FTA’s clarification on Bank interest and Dividends

Feb, 2020

Income is earned by depositing money in bank account or by holding fixed deposits or any other form of deposits. Dividend earned by holding shares in a company is also a source of income. The public clarification issued vide circular number VATP010 discusses the VAT implications on the interest income and dividend income.

Passively earned interest income generated from bank deposits does not amount to consideration for a supply. Similarly, dividend income received by merely holding shares in a company does not constitute consideration for a supply. Therefore, outside the scope of VAT, and there is no requirement to report them in the VAT return.

Interest income from bank deposits

Bank deposits may accrue interest to their holders. The interest income received is not a consideration for a supply and it is outside the scope of VAT. It is important to note that the above position only applies to interest derived from bank deposits and does not have any bearing to the interest generated from extending loans or credit, which are exempt supplies for VAT purposes.

Dividend income
The payment of a dividend by a company is a distribution of its profits to its shareholders. The holder of a share is, however, not entitled to a dividend until the company has declared a dividend. A dividend income accrues to the shareholder by merely holding shares in a company.

As the shareholder does not make a supply to receive the dividend, the dividend income cannot be treated as consideration for a supply. Accordingly, dividend income is outside the scope of VAT, and is therefore, not required to be reported on the VAT return. While dividend income is generally outside the scope of VAT, any amount charged as a “management fee” would be subject to VAT.

Source credit: tax.gov.ae

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