Insights September , 2021

Recharge of Expense Transactions | A Look at the Differing VAT Treatments

Recharges of expenses are common transactions between related parties and entities under common management control and ownership.  One typical example we see is when a parent company sets up a subsidiary in another country to act as a local representative office.   

As a representation office is not allowed to invoice customers in line accordance to its licensed activities, it is often the case that the subsidiary must rely on the parent company for financial support.  Therefore, such a subsidiary company will invoice the parent company to recharge its expense, usually at cost or with a certain mutually agreed mark-up subject to the transfer pricing rules governing both jurisdictions. 

Such recharge of expense transactions can lead to obscurity in terms of the proper VAT treatment in the UAE.  The VAT treatment of recharges of expenses depend on whether the transactions are deemed to be a “disbursement” or a “reimbursement”. 

As stipulated by the UAE Federal Tax Authority in a recent public clarification, a disbursement is to be treated as outside the scope of UAE VAT, while a reimbursement is a taxable supply and is within scope of UAE VAT. 

The primary difference between the two is whether the party making the recovery/recharge has acted as a principal or agent in the procurement of the goods and services.  When recovering as an agent, then this would be a disbursement, while recovering as a principal, then this would be a reimbursement. 

It is imperative to take several factors into consideration when making the principal versus agent considerations, such as: 

  • Which party is the recipient of goods or services; 
  • Which party is responsible for making the payment to the supplier; 
  • Which party has received the invoice or tax invoice, as the case may be; 
  • Which party has authorised you to make the payment on his/her behalf; & 
  • Whether a mark-up was charged or not. 

Based on a holistic review of the facts and circumstances, an assessment can be done on the classification and proper tax treatment.  Note that the list above is not an exhaustive list, but are rather indicators to help analyze the tax treatment for the recovery/recharge of expenses. 

Disclaimer on Use 

The information presented is intended for general information only and is not meant to be a substitute for professional advice or to be used for decision-making. 

Professional advice relies on an assessment and understanding of the specific situation for each person and, therefore, the application of changing laws and regulations in the UAE, will vary widely from case to case. 

The information contained herein is based on facts available from sources we believe to be credible at the time of publication and is subject to change. 

Disclaimer on Use

The information presented is intended for general information only and is not meant to be a substitute for professional advice or to be used for decision-making.

Professional advice relies on an assessment and understanding of the specific situation for each person and, therefore, the application of changing laws and regulations in the UAE, will vary widely from case to case.

The information contained herein is based on facts available from sources we believe to be credible at the time of publication and is subject to change.