Is VAT charged on car rental?

Article 53 – Non-recoverable Input Tax 33 1. Input Tax shall be non-recoverable if it is incurred by a Person in the following cases: a. Where the Person is not a Government Entity as specified in a Cabinet Decision in accordance with Article 10 and 57 of the Decree-Law, and there is provision of entertainment services to anyone not employed by the Person, including customers, potential customers, officials, or shareholder or other owners or investors. b. Where motor vehicles were purchased, rented or leased for use in the Business and are available for personal use by any Person. c. Where Goods or Services were purchased to be used by employees for no charge to them and for their personal benefit including the provision of entertainment services, except in the following cases: 1) Where the provision of those Goods or Services to the employees is mandatory under the applicable labour legislation in the State or any free zone, including financial and non-financial free zones, provided that this does not include the accommodation provided by the employer to its employees, unless the provision of such accommodation is mandatory pursuant to the decisions or directives issued by the Ministry of Human Resources and Emiratisation.34 2) Where it is a contractual obligation or documented policy to provide those Goods or Services to the employees, in accordance with the cases and 33 Article amended as per Cabinet Decision No. 100 of 2024. 34 Sub-clause amended as per Cabinet Decision No. 149 of 2026. Cabinet Decision No. 52 of 2017 and its amendments – As published by the Ministry of Finance 42 conditions specified by the Authority.35 3) Without prejudice to Clause 1 of this paragraph, where the Taxable Person provides health insurance, including enhanced health insurance, to its employees and their family members (as applicable) up to a husband or one wife, and three children younger than eighteen years. 4) Where the provision of goods or services is a deemed supply under the provisions of the Decree-Law. 2. For the purposes of this Article: a. The phrase “entertainment services” shall mean hospitality of any kind, including the provision of accommodation, food and drinks which are not provided in a normal course of a meeting, access to shows or events, or trips provided for the purposes of pleasure or entertainment. b. The phrase “motor vehicle” shall mean a road vehicle which is designed or adapted for the conveyance of no more than 10 (ten) people including the driver. A motor vehicle shall exclude a truck, forklift, hoist or other similar vehicle. 3. Provision of catering and accommodation services shall not be treated as entertainment services where it is provided by a transportation service operator, such as an airline, to passengers who have been delayed. 4. A motor vehicle shall not be treated as being available for private use if it is within any of the following categories: a. a taxi licensed by the competent authority within the State; b. a motor vehicle registered as, and used for purposes of an emergency vehicle, including by police, fire, ambulance, or similar emergency service; c. a vehicle which is used in a vehicle rental business where it is rented to a customer.

4. Lease of cars Motor vehicle dealers or car rental companies may engage in leasing cars to residents and tourists. Depending on the requirements of the customers, the cars may be leased for long durations (i.e. on a monthly or yearly basis) or shorter durations (i.e. on a daily or weekly basis). The activity of leasing cars is a taxable supply which is subject to VAT at 5%. 4.1. VAT implications on lease of cars The implications relating to the date of supply, invoicing obligations and payment of tax as discussed in section 2.1 above apply similarly to the lease of cars. Where the contract for the lease of cars is for an extended period, it is expected that the contract will involve periodic payments or consecutive invoices, and therefore the date of supply will be the earliest of any of the following dates provided that it does not exceed one year from the start of the lease: • • • the date of issuance of a tax invoice; the date payment is due as shown on the tax invoice; the date of receipt of payment. 4.2. Value of supply in the case of lease of cars The usual rules to determine the value of supply8 also apply to the leasing of cars. Therefore, where the entire consideration is monetary, the value of supply is the consideration less the tax amount. In other words, the value of supply is the entire amount received or expected to be received for the lease of cars, less the tax amount. It is observed that certain suppliers do not consider that they should account for VAT on the entire sum that they receive for the leasing of cars to VAT. It is, however, the supplier’s obligation to carefully consider the different components of fees charged by them and account for VAT accordingly. Example A motor vehicle trader, XYZ LLC, leased a car to a tourist for three months. The customer regularly used one of the toll roads which resulted in salik being deducted from the vehicle’s account. The lease contract stipulated that the cost of salik will be recharged by XYZ LLC to the customer. The salik deducted from the account is essentially a cost incurred by XYZ LLC to provide car leasing services to the customer. The recharge of such a cost is subject 8 Article 34 of the should Decree-Law. to VAT and be included in the taxable value of the supply. Automotive Sector | VAT Guide | VATGAM1 13

Article (17) Page 7 of 26 26 من7 صفحة Leasing Means of Transport As an exception to the provisions of Article 15 of this Agreement, the place of supply for leasing means of transport by Taxable Supplier to a Non-Taxable Customer shall be the location where these means of transport were placed at the Customer’s disposal.

BASIC TAX INFORMATION BULLETIN AUTOMOTIVE SECTOR 1. Who should read this information bulletin? Businesses in the automotive sector, including but not limited to: – – – New car dealers Used car dealers Servicing and parts’ suppliers 2. Is VAT chargeable on all supplies made by businesses in the automotive sector? Supplies made by businesses in the automotive sector are generally subject to VAT, including but not limited to: – – – Sales of new and used cars Sales of car parts Service centers’ services, warranties, and related insurance products Supplies of qualified means of transport, such as buses that are designed or adapted for public transportation of 10 or more passengers and are actually used for public transportation are, however, zero-rated for VAT purposes. 3. Is there a need for businesses in the automotive sector to register for VAT? Businesses in the automotive sector who make taxable supplies (which include zero-rated supplies) in the UAE are required to register for VAT provided the value of their taxable supplies and imports in the last 12 months exceeded, or is expected to exceed in the next 30 days, the mandatory registration threshold of AED 375,000. Businesses may also voluntarily register for VAT if the value of their taxable supplies and imports or taxable expenses incurred in the last 12 months exceeded, or is anticipated to exceed in the next 30 days, the voluntary registration threshold of AED 187,500. 4. Are tax invoices required to be issued? Yes, tax invoices are required for all standard-rated supplies. Simplified tax invoices may be issued where the supply is made to an unregistered recipient or the consideration for the supply made to a registered recipient is AED 10,000 or less. Where VAT is charged with reference to the profit margin scheme, the tax invoice should clearly state that VAT was charged with reference to the profit margin scheme and must include all other information required on a tax invoice except the amount of VAT. 5. Are the businesses in the automotive sector permitted to recover input tax? Yes, businesses in the automotive sector making taxable supplies are eligible for a full recovery of input VAT, with the exception of blocked items such as: – – Certain entertainment services. Purchased, leased or rented motor vehicles that are available for personal use.