The UAE Federal Tax Authority (“FTA”) has confirmed that in most cases recovery of VAT incurred on entertaining non-employees (including customers, potential customers, shareholders and investors) will be disallowed. This will be the case even if the business provides fully taxable supplies and is otherwise eligible for full VAT recovery on its expenses. However, the FTA clarification note does mention that “food and drinks provided during a business meeting” will not be classified as entertainment and thus VAT recovery should be possible. In such cases, the hospitality must not be the purpose for attending the meeting and it must meet certain conditions: 1) It must be provided at the same venue as the meeting; 2) If the meeting is interrupted by the hospitality (e.g. lunch), it must be a short break with the meeting resuming as normal; 3) The cost per person must not exceed the company’s policy on employee subsistence claims; and 4) The food and beverages cannot be accompanied by entertainment.
Designated Government Entities (“DGEs”) will be exempt from the above treatment and will be able to recover VAT costs relating to entertainment of non-employees.
Additionally, the FTA clarified the VAT rules with regards to employee entertainment. Generally, VAT incurred on employee dinners, long service awards and other types of gifts and entertainment will not be recoverable. However, FTA highlighted that where events are held solely for entertaining staff and the employees are charged for attending, or the business accounts for a deemed supply on gifts to employees, VAT may be recovered.
The public clarification note was released in response to requests from businesses to clarify Article 53 of the VAT Executive Regulations and provide more detailed guidance on what is qualified as an “entertainment expense”. The FTA’s position on entertainment expenses for non-employees, while conservative, is in line with the VAT rules in the EU and Malaysia. On the other hand, other jurisdictions have taken a more lenient view allowing recovery of VAT costs incurred on employee entertainment expenses. While the clarification brings much needed certainty to businesses, it also means that non-recoverable VAT costs will increase. Entertainment costs can be significant in sectors that rely on free conferences and entertainment events to attract potential customers and therefore ensuring optimised recovery of VAT costs on other types of expenses will become even more important.
In light of the FTA’s clarification, companies should review their existing VAT policies and procedures to ensure they are recovering input VAT correctly and have the supporting documentation showing accurately the cost of employee and non-employee entertainment.
Global Tax Services is an FTA-registered tax agent and has extensive VAT and International Tax experience, including impact assessments, VAT training and assisting businesses with their compliance obligations. We work with our clients to ensure their tax affairs are efficient, effective and compliant and can help businesses ensure their internal VAT policies are in line with the VAT legislation and FTA’s guidance.