Is VAT charged on car rental?

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.

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.

The type of entertainment expenses which are covered by the restriction include hospitality (e.g. accommodation, food and drinks) which are not provided in the normal course of a meeting, access to shows or events, or trips provided for the purposes of pleasure or entertainment. This means that where a business incurs any such expenses, the business will not be able to recover VAT incurred on the expenses. 10.6.2. Motor vehicles Typically, a taxable person is able to recover VAT incurred on the purchase, lease or rental of a motor vehicle which is used for their business activities and which give right to input tax recovery. However, where the motor vehicle is available for the personal use of any person, the taxable person will lose the right to recover the VAT incurred. For the purpose of this rule, the “motor vehicle” is any road vehicle which is designed or adapted for the conveyance of no more than 10 people, including the driver. “Motor vehicle” does not include a truck, forklift, hoist or other similar vehicles. This ensures that VAT on essentially commercial vehicles is not blocked due to incidental private use. A motor vehicle will not be treated as being available for private use if it is within any of the following categories:    a taxi licensed by a competent authority; a motor vehicle registered as, and used as an emergency vehicle, including by the police, fire brigade, paramedics, or similar emergency services; and a vehicle which is used in a vehicle rental business where it is rented to a customer. 10.6.3. Employee-related expenses The third category of expenses which do not give rise to VAT recovery are certain expenses incurred by a business for the purposes of their employees. VAT on employee-related expenses will not be recoverable by the business where goods or services are purchased to be used by employees for no charge to them and for their personal benefit. There are, however, certain exceptions from the above rule. Thus, the rule will not apply in the following situations: 1. Where the employer has a legal obligation to provide those goods or services to the employees under any applicable UAE labour law. 2. Where it is a contractual obligation or documented policy of the employer to provide those goods or services to employees to enable them to perform their role and where it can be proven to be normal business practice to do so in the course of employment. 40 VAT Guide | Taxable Person | VATG001