Issue

There has been uncertainty regarding the VAT treatment of options supplied in return for premiums – specifically, whether they are exempt or taxable for VAT purposes. This Public Clarification clarifies the FTA's views on this issue.

Summary

Supplies of options in respect of debt securities and equity securities in return for premiums are exempt from VAT.

Detailed discussion

What is an option and option premium:

A financial 'option' gives the holder the right to buy or sell the underlying financial instrument at a specified price.

An 'option premium' is the fee received for selling an option.

VAT treatment of options:

Article 42 of the Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law No. 8 of 2017 on Value Added Tax governs the VAT treatment of financial services.

Article 42(3) specifies that the 'issue, allotment, or transfer of ownership of an equity security or a debt security' is exempt for VAT purposes.

The terms 'equity security' and 'debt security' are defined in Article 42(1):

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.

As may be seen from the definitions, debt securities and equity securities include options in acquiring underlying interest and rights. As a consequence, options related to debt securities and equity securities are exempt from VAT in accordance with Article 42(3).

It should be noted that the above treatment does not apply to options in respect of underlying commodities or other non-debt and non-equity instruments – where such options are supplied in return for explicit premiums, they will be taxable in accordance with Article 42(4).

Adjustments for incorrect treatment:

Where a supplier has incorrectly treated the supply of exempt options as subject to VAT at 5% before 31 July 2019, they should issue a tax credit note to the recipient correcting the VAT treatment.

Furthermore, where the supplier has already accounted for that output tax on options in its tax returns, it will be able to adjust this VAT in the tax return related to the tax period in which the tax credit notes were issued, where the supplier can show that it has issued the tax credit notes and passed them on to the recipients to which the VAT was charged.

Where a VAT-registered recipient of the supply has already deducted input tax in respect of the supply, the tax credit note will also trigger the requirement to make an input tax adjustment (as a negative in the net and VAT column of Box 9) in the tax return for the tax period in which the recipient received the tax credit note.