Federal Tax Authority: new definitions, exemptions but challenges remain
The United Arab Emirates (UAE) Federal Tax Authority has provided guidance to address the taxation of virtual assets, offering businesses clearer guidance and new exemptions. The changes, which apply retroactively from January 1, 2018, are outlined in updated regulations and clarified further in VAT Public Clarification VATP040.
The UAE exempted cryptocurrencies last year – retrospectively to 2018. This guidance add to this. It also at the start of 2025 clarified VAT exemption on bitcoin mining.
New definitions of supplies
Virtual assets are now defined as digital representations of value that can be digitally traded or transferred and used for investment, excluding fiat currency and financial securities.
Exempting transfers and custody & management
Two primary exemptions have been introduced:
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Transfer and conversion of virtual assets are VAT-exempt as of the original VAT implementation date in the UAE—January 1, 2018.
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Custody and management of virtual assets are also VAT-exempt, but only if these services are not provided in exchange for explicit remuneration (e.g., fees, commissions, discounts, or rebates).
These exemptions are welcome from a compliance standpoint, but they also introduce complexity. Businesses must determine whether their transactions qualify, how they impact input tax recovery, and how to value supplies made using virtual assets—particularly when payments are made in tokens or cryptocurrencies with fluctuating values and no official exchange rate.
Challenges to new VAT guidance
While these updates offer needed clarity, they raise practical challenges. Businesses must reassess their VAT positions and determine whether transactions qualify for exemption, particularly given the retrospective effect.
- Stablecoins: A key issue lies in their treatment —cryptocurrencies pegged to traditional currencies. Since the definition excludes digital representations of fiat money, such stablecoins may not be considered virtual assets, though this remains uncertain due to contradictory interpretations.
- Nonfungible tokens (NFTs) also remain a gray area. While NFTs may represent value, their classification under VAT is unclear, with regulatory bodies like the Dubai International Financial Centre excluding them from the scope of crypto tokens.
- Valuing transactions: When businesses are paid in virtual assets—especially their own project tokens or less liquid crypto—it becomes difficult to determine the taxable value of the supply. This challenge remains even when major cryptocurrencies are used, due to market volatility and lack of standardised pricing. The absence of monetary consideration complicates invoice issuance, VAT calculation, and input tax recovery, potentially leading to disputes or errors in tax filings.
- Input VAT recovery is constrained when dealing with VAT-exempt virtual asset transactions. Businesses cannot recover VAT on costs directly related to exempt activities. If the standard apportionment method does not accurately reflect actual use, the Federal Tax Authority (FTA) may require businesses to apply for a special method or make year-end adjustments.
- Barter transactions involving virtual assets can inadvertently create exempt supplies, affecting input VAT recovery. If the standard input tax recovery method does not reflect actual use, businesses may need to make year-end adjustments or apply for a special method.
Overall, the revisions are a step forward but require careful interpretation and case-by-case evaluation to ensure compliance.
