VAT Treatment on Financial Services in the UAE

VAT can feel confusing on its own, and when you add financial services to the mix, things get even trickier. VAT in UAE applies to most goods and services, but financial services don’t always follow the same rules. That’s because many of these services involve interest, margins, or complex fee structures, so the VAT treatment is a little different from regular transactions.

If you’re a bank, insurance company, lender, fintech startup, or even a business that deals with financial transactions from time to time, understanding these VAT rules is really important. A small mistake like charging VAT when you shouldn’t, or missing VAT when it should apply, can lead to compliance issues or penalties. That’s why staying updated with the rules related to the VAT on financial services in the UAE and the latest Federal Tax Authority (FTA) guidelines matters.

What Counts as Financial Services under UAE VAT Law?

To get the tax treatment right, you first need to know if your activity actually qualifies as a “Financial Service” in the eyes of the Federal Tax Authority (FTA).

According to UAE VAT Executive Regulations (specifically Article 42), Financial Services are broadly defined as services connected to dealings in money (or its equivalent) and the provision of credit. Essentially, if your business involves exchanging currency, providing loans, or managing accounts where money is stored, you are likely operating in this sector.

Some of the common examples of financial services under UAE VAT regulations include:

• Interest-based lending such as personal loans, business loans, and mortgages
• Deposit-taking activities like savings accounts and fixed deposits
• Money transfers and remittance services
• Currency exchange services
• Issuing, transferring, or trading securities, including shares, bonds, and Sukuk
• Insurance services, both life and general insurance
• Credit card services, including issuing cards or managing payments
• Investment management services and brokerage activities

Traditional Financial Services vs Fintech/Digital Financial Services

The line between a “tech company” and a “finance company” is blurrier than ever. However, for VAT purposes, the distinction is vital because the nature of the income often dictates the tax rule.

1. Traditional Financial Services: These are the classic banking activities. The revenue is usually generated through implicit margins (like interest spreads).

For example, a traditional bank lends money for a house and charges 5% interest. This interest income is generally exempt from VAT.

2. Fintech & Digital Financial Services: Fintech companies often provide financial services but charge for them differently, usually through explicit fees or subscriptions.

For example, a digital payment app charges a “transaction fee” or a “platform subscription” to let users send money. Because this is a clear fee for a service (and not just an interest margin), it is often Standard Rated (5%).

The FTA looks at what is being supplied, not just who is supplying it. Even if you call yourself a technology company, if you are facilitating financial transactions for a fee, you fall under these VAT rules.

What is the VAT on Financial Services in the UAE?

Financial services in the UAE don’t all fall under one type of VAT treatment. Depending on how the service earns its income – whether through margins, interest, or clear fees, it may be zero-rated, exempt, or standard-rated at 5%.

A. Zero-Rated Financial Services (0% VAT)

This is the most beneficial category for businesses. When a service is “Zero-Rated,” you charge the customer 0% VAT, but you are still allowed to claim back the VAT on your own business expenses (like software or rent).

When does this apply? This mostly applies to exported services. If you are a UAE bank or financial institution providing services to a recipient who is outside the UAE (and outside the GCC VAT implementing states), the service is typically Zero-Rated.

Examples:

• Financial services provided to a non-resident client (e.g., a Dubai firm advising a client in London).
• International money transfers where the transaction happens cross-border.

B. Exempt Financial Services (No VAT Charged)

“Exempt” means you do not charge VAT to the customer. However, there is a catch – if your revenue is exempt, you generally cannot claim back the VAT you paid on expenses related to that service. This effectively becomes a cost to the business.

When does this apply? This category covers “passive” income where the bank or lender makes money through a margin or spread rather than a direct fee. It implies that the value is hidden in the interest rate or exchange rate.

Examples:

• Interest Income: Interest earned on loans, mortgages, or credit cards.
• Life Insurance: Premiums for life insurance policies are typically exempt.
• Issue of Securities: Issuing or transferring ownership of shares or bonds.
• Currency Exchange Margins: The difference between the “buy” and “sell” rate of a currency (if no separate fee is charged).

C. Standard-Rated Financial Services (5% VAT)

This is the default category for most business services. Here, you charge the standard 5% VAT on the bill, and you can claim back the VAT on your business expenses.

• When does this apply? This applies to services that are fee-based. If there is a specific charge for a specific action – like an administration fee, a commission, or a subscription- it is considered a standard commercial service and is taxed at 5%.

Examples:

• Bank Charges: Monthly account maintenance fees, wire transfer fees, or ATM withdrawal fees.
• Card Fees: Annual membership fees for credit cards.
• Advisory & Consultancy: Fees charged for investment advice or wealth management planning.
• Brokerage Fees: Commissions charged by a broker for buying/selling stocks.
• General Insurance: Unlike life insurance, policies for cars, health, and property are usually subject to 5% VAT.

VAT Treatment on Fee-Based vs Margin-Based Transactions

One of the biggest factors that decides how VAT applies to a financial service in the UAE is how the provider earns money from the transaction.

Fee-Based Transactions – Standard Rated at 5%

Fee-based transactions are the easiest to identify for VAT purposes. Here, the financial institution charges a clearly stated fee for the service. Since the payment is fixed and transparent, the UAE VAT Law treats these services as taxable at the standard rate of 5%.

Examples of fee-based financial services include:

• Loan processing or application fees
• Credit card annual fees
• Brokerage fees for buying or selling securities
• Investment or fund management fees
• Bank statement issuance charges
• Administrative or service charges

Why these are taxable:

There is a direct, measurable fee that counts as “consideration,” making VAT calculation straightforward.

Margin-Based Transactions – Exempt from VAT

Margin-based transactions work differently. Instead of charging a fixed fee, the financial institution earns money from the margin or difference in price, such as interest or spread. Because there isn’t an explicit fee tied to the service, these transactions are treated as exempt from VAT.

Examples of margin-based financial services include:

• Interest earned on loans or credit facilities
• Currency exchange margins
• Trading securities where income comes from price differences
• Returns on fixed deposits or savings accounts

Why these are exempt:

There’s no clear, identifiable fee that the FTA can tax. Since income is generated indirectly, VAT cannot be applied in the usual way.

VAT Treatment on Islamic Finance Products in UAE

Islamic finance works differently from conventional banking because it follows Sharia principles, which prohibit interest (riba). Instead of traditional lending, Islamic financial institutions use alternative contract structures like profit-sharing, leasing, or cost-plus financing.

Even though these products look different from a legal or religious perspective, the UAE VAT Law focuses on the “economic substance” of the transaction, meaning how the product actually works in practice, not just what it is called.

In other words: If an Islamic finance product serves the same purpose as a conventional financial product, the VAT treatment will usually be the same.

How VAT Applies to Islamic Finance

The FTA treats Islamic finance products just like their conventional counterparts, as long as the underlying economic activity is similar. So:

• If the product is margin-based, it is typically exempt from VAT
• If the product involves a clear fee, it is generally standard-rated at 5%
• If the service is supplied to a non-resident and meets export conditions, it may be zero-rated

Examples of Islamic Finance Products and Their VAT Treatment

1. Murabaha (Cost-Plus Financing)

In a Murabaha transaction, the bank buys an asset and sells it to the customer at a marked-up price, payable over time. The profit margin acts like interest in a conventional loan.

Therefore, the income earned is usually exempt from VAT, unless there are additional service fees involved (which would be taxable at 5%).

2. Ijara (Islamic Leasing)

Ijara is similar to a leasing arrangement where the bank owns the asset and leases it to the customer. Lease rentals may be standard-rated at 5%, depending on the nature of the asset and terms. If the arrangement mimics interest-based financing, the margin element could be treated as exempt.

3. Mudaraba (Profit-Sharing Partnership)

In Mudaraba, one party provides capital and the other provides expertise, and profits are shared. Returns to the investor are similar to investment income. These are typically exempt, unless a clearly defined management fee is charged (which becomes standard-rated).

4. Sukuk (Islamic Bonds)

Sukuk represent ownership in an asset or project, and returns come from profit, not interest. The trading or issuing of Sukuk is treated like dealing in securities. Therefore, it is generally exempt from VAT. Any associated advisory or management fees remain taxable at 5%.

VAT on Insurance Services in the UAE

When it comes to insurance, the UAE VAT Law splits policies into two distinct worlds. The tax you pay depends entirely on what you are insuring – a life or a tangible asset.

1. Life Insurance — Exempt from VAT

Life insurance products are exempt from VAT in the UAE.

This means:

• No VAT is charged on premiums
• Insurers cannot recover input VAT on related costs

Life insurance policies usually include:

• Whole life plans
• Term life insurance
• Takaful life products
• Endowment and savings-linked life policies

The income from life insurance is considered similar to other financial services that are interest or return-based, not fee-based. Since there’s no clear “service fee” component, VAT is not applied.

2. General Insurance — Standard Rated at 5%

All general or non-life insurance products are taxable at the standard 5% VAT rate. Unlike life insurance, general insurance involves clear premiums and specific risk-based services, making VAT applicable.

General insurance includes:

• Motor insurance
• Health insurance
• Property and home insurance
• Travel insurance
• Marine and cargo insurance
• Liability insurance
• Takaful general insurance

These products offer a defined service (risk coverage) in exchange for a clear premium. Since there is a direct fee for the service, VAT applies in the usual way.

VAT Compliance Requirements for Financial Service Providers

To stay compliant and avoid penalties, financial services must follow clear rules around documentation, reporting, and classification.

1. Proper Record Keeping: Providers must maintain clear records of all transactions – fee-based, margin-based, and cross-border, and keep them for at least five years.
2. Issuing Tax Invoices (When Required): Tax invoices must be issued for standard-rated services. Exempt services don’t require an invoice, but internal records should still be kept.
3. Correct VAT Classification of Services: Every service must be classified accurately as exempt, zero-rated, or standard-rated. Even a small mistake can cause compliance issues, so correct classification is essential.
4. Filing Accurate VAT Returns: VAT returns must be submitted on time and must correctly show all VAT collected, VAT recoverable, and any adjustments related to exempt or zero-rated supplies.
5. Input Tax Recovery and Apportionment: Since financial institutions make both taxable and exempt supplies, they must use an apportionment method to calculate how much input VAT they can recover.
6. Applying the Reverse Charge Mechanism (RCM): When financial services are imported from outside the UAE, the business may need to apply the reverse charge mechanism. This requires them to account for VAT themselves, ensuring imported services are reported correctly.

Stay on Track with the Right VAT Support

VAT on financial services in the UAE can get complicated quickly. With different treatments for fees, margins, cross-border transactions, Islamic finance, and insurance, it’s easy for businesses to feel overwhelmed. If your business deals with financial activities in any form, it’s always a good idea to get proper guidance instead of trying to figure everything out on your own.

At Shuraa Tax, we help businesses cut through the confusion. Our team helps businesses with everything – from VAT registration and advisory to compliance, return filing, and ongoing support. We make the rules easy to understand and handle all the technical work for you. If you ever need expert help with VAT, we’re just a call away.

Commonly Asked Questions

1. Are all financial services subject to VAT in the UAE?

No. VAT on financial services in the UAE can be standard-rated (5%), exempt, or zero-rated, depending on the type of service and how the income is earned.

2. What makes a financial service exempt from VAT?

Services that earn income through interest, spreads, or margins, such as loans or trading in securities, are usually exempt because there is no clearly defined fee to tax.

3. When is VAT charged at 5% on financial services?

VAT applies at 5% when a financial service charges a clear, identifiable fee, such as advisory fees, processing fees, credit card charges, or brokerage fees.

4. Are Islamic finance products treated differently for VAT?

No. Islamic finance products follow the same VAT treatment as conventional products. The rules focus on the economic substance of the service, not the structure.

5. Can financial institutions recover input VAT?

They can recover input VAT on taxable supplies, but for exempt supplies, they must use an apportionment method to calculate how much VAT can be reclaimed. This is a key part of managing VAT on financial services in the UAE.