With less than a month to go before VAT is implemented in both the Kingdom of Saudi Arabia and the United Arab Emirates, legislation and regulations have been finalised. As business across the GCC move into a new tax era, key decision makers must ensure that their people, their systems and their technologies are sufficiently prepared – and sufficiently agile – to deal with a new business paradigm.


What is VAT?

  • VAT is a tax on consumption, not income or profits.
  • The GCC countries have agreed a standard VAT rate of five percent (5%).
  • Supplies of goods and services are generally standard-rated but can also be zero-rated, exempt or out of scope.
  • Registered suppliers will account for VAT on the price of a good or service they supply and pay VAT to the tax authority on a regular basis.
  • Registered businesses should (where the supplies they make are either standard- or zero-rated or out of scope) be able to recover most of the VAT they incur in making those supplies.
  • Registered businesses that make supplies that are exempt from VAT will not be able to recover the VAT they have incurred in the course of making those supplies.
  • Registered businesses that make supplies that are predominantly zero-rated will usually be in a VAT refund position.


How will VAT affect the takaful sector?
  • Takaful is generally based on forming a common pool of funds, making “conditional donations” – tabarru - and investing in riba-free instruments.
  • From a VAT perspective, conventional insurance and takaful are treated the same.
  • Saudi Arabia’s implementing regulations state that general takafulwill be standard rated, while family takaful plans are exempted from VAT.
  • Output VAT on facultative reinsurance contracts and treaty contracts may differ.
  • Fee-based services such as surrender, partial withdrawal or re-instatement fees, are standard rated.
  • Reinsurance is a common practice in the takaful industry with takafuloperators purchasing retakaful contracts. The applicable VAT rate may depend on the place of the underlying risk, the place of the takafuloperator or the place of the takafulreinsurer.
  • Output VAT on facultative reinsurance contracts and treaty contracts may differ.
  • The apportionment of input tax credits may be required if general takaful has any investment elements (such as investment-type riders) as part of the policy.
  • Exemptions increase costs for takaful operators as they will be unable to recover VAT paid on exempt supplies.
  • Takaful operators will want to maximise the recovery of input tax credits, requiring them to carefully consider any purchases of goods and services and how best to minimise input VAT they cannot claim.
  • Takaful operators may decide to increase the costs they charge their customers –but will need to be wary of regulatory constraints and the impact on their competitive advantage.
  • Transitional issues will arise when takaful plans purchased or renewed before the VAT implementation date (1 January 2108 for Saudi Arabia and the UAE) if coverage periods straddle that date. Takaful operators may be required to charge VAT on the premium. If the takaful operator is unable to pass on the VAT liability to policyholders, this will reduce revenues.








What still needs to be clarified?

  • Will there be any deemed input tax credit on cash settlements made by takaful operators for their business-to-customer insurance business?
  • How will self-billing arrangements apply to reinsurance contracts? How will insurance contracts underwritten outside the country but provided locally (in other words, the insurance policy is supplied by an overseas insurer with a branch in the country) be taxed?


Important note

Keypoint’s VAT briefs are based on a translation of the Unified VAT Agreement for the Cooperation Council for the Arab States of the Gulf (the GCC VAT treaty), Saudi Arabia’s VAT legislation, the UAE federal law, the Saudi implementing regulations, the UAE’s executive regulations and general VAT principles and are provided for information purposes only. Saudi Arabia and the UAE continue – as of the date of release of this brief – to work towards an implementation date of 1 January 2018. This brief is not a substitute for professional advice. You should seek appropriate professional advice from a tax advisor before making any decision relating to your particular circumstances.

Mubeen Khadir
Head of Tax Consulting

+973 17206879

+973 3222 6811

George Campbell
Associate Director

+973 17206872

+973 3833 8641