Is VAT charged on Islamic finance products?

Article 42 – Tax Treatment of Financial Services 27 1. For the purposes of this Article: 25 Article amended as per Cabinet Decision No. 100 of 2024. 26 Clause amended as per Cabinet Decision No. 149 of 2026. 27 Article amended as per Cabinet Decision No. 100 of 2024. Cabinet Decision No. 52 of 2017 and its amendments – As published by the Ministry of Finance 32 a. The phrase “debt security” means any interest in or right to be paid money that is, or is to be, owing by any Person, or any option to acquire any such interest or right. b. The phrase “equity security” means any interest in or right to a share in the capital of a legal person, or any option to acquire any such interest or right. c. The phrase “life insurance contract” means a contract lawfully entered into to the extent that it places a sum or sums at risk upon the contingency of the termination or continuance of human life, marriage, similar relationships permitted under applicable law, or the birth of a child. d. The phrase “Islamic financial arrangement” means a written contract which relates to a supply of financing in accordance with the principles of Shariah and relevant laws. 2. Financial Services are Services connected to dealings in money (or its equivalent) and the provision of credit and include for instance the following: a. The exchange of currency, whether effected by the exchange of bank notes or coin, by crediting or debiting accounts, or the like. b. The issue, payment, collection, or transfer of ownership of a cheque or letter of credit. c. The issue, allotment, drawing, acceptance, endorsement, or transfer of ownership of a debt security. d. The provision of any loan, advance or credit. e. The renewal or variation of a debt security, equity security, or credit contract. f. The provision, taking, variation, or release of a guarantee, indemnity, security, or bond in respect of the performance of obligations under a cheque, credit, equity security, debt security, or in respect of the activities specified in paragraphs (b) to (e) of this Clause. g. The operation of any current, deposit or savings account. h. The provision or transfer of ownership of financial instruments such as derivatives, options, swaps, credit default swaps, and futures. i. The provision or transfer of ownership of a life insurance contract or the provision of re-insurance in respect of any such contract. j. The management of investment funds, which means “services provided by the fund manager independently for a consideration, to funds licensed by a competent authority in the State, including but not limited to, management of the fund’s operations, management of investments for or on behalf of the fund, monitoring and improvement of the fund’s performance”. k. The transfer of ownership of Virtual Assets, including virtual currencies. Cabinet Decision No. 52 of 2017 and its amendments – As published by the Ministry of Finance 33 l. The conversion of Virtual Assets. m. Keeping and managing Virtual Assets and enabling control thereof. n. Agreeing to do or arranging any of the activities specified in paragraphs (a) to (m) of this Clause, other than advising thereon. 3. The following financial services shall be exempted: a. Activities under Clause 2 of this Article where they are not conducted in return for an explicit fee, discount, commission, and rebate or similar. b. The issue, allotment, or transfer of ownership of an equity security or a debt security. c. The provision or transfer of ownership of a life insurance contract or the provision of re-insurance in respect of any such contract. d. Fund management services described in paragraph (j) of Clause 2 of this Article. e. Services specified in paragraphs (k) and (l) of Clause 2 of this Article, including services supplied on or after 1 January 2018. 4. Activities under Clause 2 of this Article shall be subject to tax where the consideration payable in respect of a supply of Services is an explicit fee, commission, discount, and rebate or similar. 5. Islamic finance products, being financial products under contract which are certified as Islamic Shariah compliant, which simulate the intention and achieve effectively the same result as a non-Shariah compliant financial product, will be treated in a similar manner as the equivalent non-Shariah financial product for the purpose of applying exemption from Tax. 6. Any supply made under an Islamic financial arrangement shall be treated in such a way as to give an outcome for the purposes of the Decree-Law and the decisions issued by the Authority, comparable to that which would be the case for their nonIslamic counterparts. 7. Where Article 31 of this Decision applies in respect of a supply of financial services, this supply should be treated as zero-rated.

In determining the correct VAT treatment for Islamic finance products, the purpose, structure and pricing of the Islamic product will be considered. Accordingly, in order to ascertain the VAT liability of an Islamic financial product, the following process should be followed. Step 1 Step 2 Analyze the Islamic finance structure Identify the different supplies (and number of these) in the Islamic finance structure Step 3 Step 4 Establish the VAT liability of those supplies as if they were non-Islamic financial supplies Apply the same VAT treatment to the Islamic Finance supplies 4.2.2 Example For example, a commodity Murabaha entered into for lending purposes will be treated as a loan for VAT purposes. Any explicit fees will be taxable, unless the fees are only made explicit as a requirement of Shariah law and where their non-Islamic equivalents would also be treated as exempt. Accordingly, the profit derived from the supply of the commodity on deferred payment terms would be exempt if this is used de facto as a loan and the non-Islamic equivalent consideration is interest. 4.2.3 Non-equivalent products It is recognised, however, that certain aspects of Islamic finance may preclude direct equivalence in VAT treatment being applied. In such cases, the underlying purpose, 14 VAT Guide | Financial Services | VATGFS1

In determining the correct VAT treatment for Islamic finance products, the purpose, structure and pricing of the Islamic product will be considered. Accordingly, in order to ascertain the VAT liability of an Islamic insurance or reinsurance product, the following process should be followed. Step 1 Step 2 Step 3 Step 4 Analyze the Islamic finance structure Identify the different supplies (and number of these) in the Islamic finance structure Establish the VAT liability of those supplies as if they were non-Islamic financial supplies Apply the same VAT treatment to the Islamic Finance supplies 4.2.2 Example For example, family takaful provides a combination of long term savings and protection for participants and their dependants typically arising from death, disability or survival. Generally, supplies of family takaful or family retakaful products would be exempt from VAT as their non-Islamic equivalents of life insurance or reinsurance would be. In non-Islamic Finance, if the savings element relates to investment in a fund and the insurance provider were to make a separate charge for managing this fund, then the same treatment would apply to the Islamic fee, i.e. it would be taxable. 4.2.3 Non-equivalent products It is recognised, however, that certain aspects of Islamic insurance may preclude direct equivalence in VAT treatment being applied. In such cases, the underlying purpose, features and circumstances of the product concerned must be taken into account when determining the appropriate VAT treatment. Any significant difference in the overall liability between an Islamic insurance product and any non-Islamic counterpart arising as a consequence of differential treatment being applied will be addressed on a product by product basis. Page 14 VAT Guide | Insurance | VATGIN1