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Implementation of VAT in the year 2018 has brought a significant reform in the way business transactions happen in the UAE. The FTA has introduced value-added taxes in various sectors including healthcare, financial services, education, real estate etc. VAT treatment in the insurance sector, however, stayed a matter of debate for a long time because of the diverse services and products offered within the country. Recognising the issue, FTA has issued several guidelines for clarification on the VAT treatment of the insurance industry in the UAE.
The VAT treatment of life insurance and reinsurance products may vary depending on the consumer’s residence. Also, the taxation may vary for other Islamic, real estate, and bundled insurance services. The article below gives a complete VAT guide for life insurance in the UAE.
The value-added taxes apply to the business transactions involving the supply of goods and services. According to the general principle, the VAT treatment of all insurance products and related services are subject to value-added tax at standard rates. The VAT on Life insurance in UAE can be charged at zero rates or be exempted depending on certain factors.
The state authorities charge VAT at standard rates (of 5%) for several products and supplies in the UAE. The businesses can recover the full taxation costs charged by their suppliers on the goods and services. However, they need to be registered for VAT and fulfill the pre-specified criteria. All the insurance products in UAE are charged at standard rates and the insurance companies can recover the VAT charges except for the life insurance policies.
Various commodities in UAE are charged at 0% VAT. The authorities treat these products as taxable supplies in all respect including the rights of the person making supplies to recover VAT on their business expenses. Life insurances in UAE can be charged at zero rates subject to individual’s residency.
Like zero-rated supplies, the state authorities do not charge VAT on exempted products. Also, since the commodities are non-taxable, the supplier cannot recover any of the VAT on expenses incurred in making exempted supplies. Life insurance products for the GCC nationals are categorised under exempted supplies.
Additionally, businesses manufacturing a variety of different VAT chargeable products need to use the method of apportionment to levy VAT on the general cost of the product.
As mentioned earlier, all insurance and related services are subject to VAT at standard rates. Life insurance contracts and general intermediation are a type of financial service according to Executive Regulations in UAE. Hence, standard VAT rates apply to these products. The collection or payment of any amount of principal, dividend, or interest will be considered under the standard rates. This also includes payments and collections related to debt security, credit, and life insurance contracts.
There are certain exceptions to the general principle. Let us examine them. The VAT liability is exempted for the financial services related to the transfer of ownership of life insurance or re-insurance.
In the case of exported life insurance services, where the recipient establishes outside the GCC states, the authorities will charge a zero-rated VAT. The companies will be able to recover the input tax completely in such cases.
If the services are being received by a UAE VAT registered business from a person established outside of the UAE, those services are liable for VAT at standard rates. In such cases, the authorities will apply a reverse charge mechanism and the importer is accountable for the VAT incurred on such services.
Since certain financial services are remunerated without any explicit fees they are exempted from VAT. Following class of financial services are exempted from VAT.
A registered business will not be able to recover the input tax since the products are exempted from VAT.
The following table summarises charges on various Life Insurance in UAE
Type of Life Insurance
GCC countries’ VAT law must comply with the GCC Framework Agreement. However, if the framework does not specify VAT treatment, the GCC state can have its own laws.
Businesses in the UAE whose value of taxable products exceeds USD 100,000 annually need to register for VAT. However, any business organization can register voluntarily.
Life insurance and reinsurance are exempted from VAT for UAE nationals and residents. For a recipient outside of the UAE, zero rates VAT is applicable.