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21 February 2024

FTA sets requirements for recovering tax on entertainment services for employees


The Federal Tax Authority, FTA, has determined the "Entertainment Services" supplied to employees, for which registered businesses cannot recover the taxes they incurred, explaining that these are mainly the expenses associated with activities to entertain personnel, such as staff parties that are free to attend.

The authority noted that according to Federal Decree-Law No. (8) of 2017 on Value Added Tax, VAT, and its Executive Regulations, VAT incurred on goods or services purchased to be given away to staff free of charge, in order to reward them for long service, should be blocked from recovery (unless the business accounts for a deemed supply). Examples of these gifts include long service awards, retirement gifts, Eid gifts, or gifts for other festivals or special occasions, gifts given on the occasion of a wedding or birth of a child; employee of the month gifts, or a dinner to reward service.

The authority had issued these statements in a Public Clarification on "Non-Recoverable Input Tax – Entertainment Services", published on its website.

The FTA has clarified that Entertainment Services consist of "hospitality of any kind" including the provision of accommodation, food and drinks which are not provided in a normal course of a meeting, and access to shows or events, or trips provided for the purposes of pleasure or entertainment. Meanwhile, VAT registrants who are not "Designated Government Entities" (as per Cabinet Decision No. (52) of 2017 on the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on VAT), Input Tax shall be non-recoverable if it is incurred by a person in respect of entertainment services provided to anyone not employed by the person, namely: customers; potential customers; officials; or shareholders, or other owners or investors.

FTA Director-General, Khalid Ali Al Bustani, asserted that the "Public Clarifications" service is part of the authority’s strategy to provide best-in-class services using advanced electronic systems and relying on innovative approaches to address the needs of customers and educate them with regards to their rights and obligations as per the UAE tax system.

Al Bustani noted that the service is available to everyone and it helps to clarify any misconceptions and introduces all technicalities and concepts surrounding taxes in the UAE. "These clarifications are formulated after a thorough study of the tax laws, executive regulations, and the guides published on the Federal Tax Authority’s website," he said in conclusion.

The authority explained that, on the flip side, if a Designated Government Entity provides entertainment services to anyone not employed by the entity, it shall be eligible to recover the input tax incurred on those costs. This exception pertains only to entertainment services provided to non-employees, including meetings with delegations from other countries where lunch or dinner is provided, meetings with representatives from other government entities to discuss official business, where refreshments are provided, or ceremonies held to mark significant political events, for example, the signing of an international agreement, where entertainment is provided to the audience.

The FTA noted that where goods or services are purchased by any person to be used by employees for no charge to them and for their personal benefit, including the provision of entertainment services, then the VAT incurred on the cost is not recoverable except in exceptional cases. This means that any entity, including Designated Government Entities, which provide entertainment services to employees are prevented from recovering any VAT included on such costs. The only circumstances in which a taxable person is entitled to recover VAT on such costs are: where it is a legal obligation to provide those services or goods to those employees; it is a contractual obligation or documented policy to provide those services or goods to those employees so that they may perform their role and it can be proven to be normal business practice; and where the provision of goods or services is a deemed supply under the provisions of the Decree-Law.

As for employee expenses, the authority outlined certain circumstances where a Taxable Person will fund or reimburse an employee for certain costs that the employee incurs for business purposes, in the course of performing his/her role. These include cases where an employee is on a domestic business trip and requires overnight accommodation, the VAT incurred on hotel costs, for example, would be recoverable, as well as input tax incurred on subsistence costs, for example, food and drinks purchased by the employee for their own consumption during the business trip. Nevertheless, if the employee incurs costs which are related to entertaining a current or potential customer/supplier, then any associated Input Tax incurred will be non-recoverable.