After a period of much debate as to the application of VAT in the re/insurance industry in the UAE, the UAE Federal Tax Authority (FTA) has provided some clarification in the form of a VAT guide for the UAE insurance sector (the Guide) issued on 2 October 2018. The FTA recognises that transactions in the insurance sector have been complex to analyse. We have highlighted below a few of the more pertinent issues addressed in the Guide.

Bundled products

Insurance products may be packaged or 'bundled' together where they would ordinarily be treated as separate services. The issue that arises is how to characterise such a supply, where services are treated to different degrees of taxation; one supply may be taxed with the standard VAT rate and another with a zero rate or exemption, such as the provision of add-on insurance products ('riders') to a life insurance policy.

The FTA has clarified that there will be a single composite supply where one or more elements of the supply comprise the principal component, with other elements being ancillary – i.e. not an aim in itself, but a means of better enjoying the principal component. A single composite supply exists where there is a supply which has two or more elements which are so closely linked that they form a single supply and which it would be artificial or impossible to split. A single composite supply will only typically exist where:

  • the price of the different components of the supply is not separately identified or charged by the supplier; and
  • all the components of the supply are supplied by a single supplier.

This means that if, for example, a policyholder takes a life insurance policy and tops this up with a health rider under one contract, and the prices are not separately identified, the premium would be exempt because the principal component is the life insurance, not the health insurance.

Transitional issues

There was considerable debate at the start of the year as to the appropriate VAT treatment for insurance policies that had been entered into and paid for before 1 January 2018 but provided coverage after this date. This was most frequently faced in relation to policies held by individual retail customers where insurance policies did not contain a specific VAT clause and resulted in insurers not being able to recover any VAT. The FTA has clarified that part of the premium which is due post 1 January 2018 is liable to VAT and insurers should have applied a fair and reasonable pro-rata to premiums received before 1 January 2018 which apply to services which are provided/have been provided after that date.

Apportionment of overheads

VAT incurred on costs which are partly attributable to taxable supplies (e.g. non-life insurance) and also to exempt supplies of financial services (e.g. life insurance) must be apportioned and the supplier must make use of an input tax apportionment method in order to determine the amount of input tax which it may recover in such circumstances. Where input tax cannot be wholly attributed to any particular supply, the FTA has indicated that a business may choose between either using the standard input tax apportionment method or by way of a special input tax apportionment method specifically approved by the FTA if the standard approach will not render a fair and reasonable result.

The standard input tax apportionment method requires applying the recovery ratio percentage to the residual input tax. An 'annual adjustment' should be carried out in the first tax period following the end of the previous tax year. If this annual adjustment reveals a difference of more than AED 250,000 in any tax year between the recoverable input tax and the input tax which would have been recoverable if the calculation was made on the basis of the actual use of the goods or services, then an adjustment should be made to the input tax in the first tax period following the end of the relevant tax year. Where the difference is less that AED 250,000, no adjustment is required to be made.

Insurance intermediaries (agents/brokers)

Where an insurance intermediary (i.e. an agent or broker) acts as a disclosed agent for an insurance transaction, the collection of the premium from the insured on the insurer's behalf and remission of the premium to the insurer (possibly net of commission) are not supplies for VAT purposes. The commission or fee charged by the intermediary to the insurer or insured for the services provided is a supply and is either liable to VAT at the standard or zero rate, or is out of scope, depending on the application of the place of supply rules. It is clear that the FTA envisages that the intermediary is providing a service to either the insured or the insurer. It will therefore be important for intermediaries and their principals to make clear what service is being provided by the intermediary, and to whom. We would anticipate that an intermediary's terms of business with its principal/s should make this clear, in order to provide clarity to the VAT treatment of the services provided.


The FTA has confirmed that reinsurance placed with a reinsurer located outside UAE should be treated as an imported service and the reinsurance premium payable by the insurance company will be subject to VAT under the reverse charge mechanism (except for life reinsurance which is exempt).

Recovery of input VAT on health insurance premiums

The FTA makes a distinction between health insurance provided for an employee and family members of that employee:

  • Employees: An employer will be able to recover input tax on premiums on health insurance coverage provided by the employer to employees as a benefit which is part of a contract of employment;
  • Family members of employees: Where health insurance is also provided to the family members of the employee, input tax can only be recovered if there is a legal obligation to provide the insurance to these family members.

This requirement for a legal obligation would only be fulfilled where the labour law stipulates that the employee's family members must be provided with health insurance. There is currently no legal obligation in Dubai on the employer to provide health insurance to the family members of an employee, whereas the Abu Dhabi Health Insurance Law mandates employers to provide such extended benefits to the employee's spouse and three of the employee's children below 18 years of age. A mere contractual term of employment to provide health insurance to an employee's family will not enable VAT to be recovered.

Insurance on Real Estate

Where a supply of services is considered to be related to real estate, the place of supply of the services is where the real estate is located. The FTA has clarified that a supply of insurance in respect of real estate will not be considered as a supply of services related to real estate and such supply shall be determined based on general place of supply rules, unless the insurance is included within the service charge for real estate.

Export of life insurance

The supply of life insurance to a recipient established outside the GCC Implementing States (whether or not such supply would otherwise have been exempt where supplied in the UAE) will be zero-rated (i.e. treated as taxable supplies).

Islamic insurance

The FTA has clarified that there must be equality of VAT treatment between Islamic and non-Islamic finance products. Therefore, any supply made under an Islamic financial arrangement, which is certified as Shariah compliant, and which has the intention of and achieves effectively the same result as a non-Islamic financial product, must be treated in such a way as to give an outcome for the purposes of VAT comparable to that which would be the case for its non-Islamic counterpart. However, where non-equivalent products are supplied, the features and circumstances of the product concerned must be taken into account when determining the appropriate VAT treatment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.