Background
ABC Trading LLC is a VAT-registered company in the UAE engaged in selling electronic products. As part of its marketing activities, the company provides free promotional items (commercial gifts) to customers and business partners.
Since ABC Trading LLC has recovered input VAT on these goods, providing them free of charge may generally be considered as a deemed supply under Article 11 of the UAE VAT Law.
However, Article 12 of the UAE Federal Decree-Law No. 8 of 2017 on Value Added Tax and Article 5 of its Executive Regulation provide exceptions under which such free supplies will not be treated as deemed supplies, provided the prescribed conditions and thresholds are met.
The company needs to determine whether the AED 500 per recipient limit and the AED 2,000 output VAT / AED 40,000 aggregate value limit should be applied together or separately.
Scenario 1 – Each Recipient Receives Gifts Below AED 500, but Total Gifts given by the company to all the recipients exceeds AED 40,000
Facts:
During the last 12 months, ABC Trading LLC distributed promotional gift baskets to customers as follows:
|
Recipient
|
Value of Gift
|
|
Customer A
|
AED 400
|
|
Customer B
|
AED 450
|
|
Customer C
|
AED 300
|
|
Customer D
|
AED 450
|
|
150 other customers
|
AED 400 each
|
Total Value of gifts distributed: AED 61,600
Output VAT: AED 61,600 × 5% = AED 3,080
The aggregate output VAT exceeds AED 2,000 threshold under Article 5(2)(a).
Analysis
Test 1 – AED 500 per recipient threshold (Article 5(1))
The value of gifts provided to each recipient is below AED 500.
Example:
- Customer A received AED 400
- Customer B received AED 450
Therefore, the company satisfies the AED 500 per recipient exception.
Does exceeding the AED 40,000 aggregate limit change the result?
No. Although the total value of gifts provided by ABC Trading LLC exceeds AED 40,000 and the output VAT exceeds AED 2,000; this does not affect the application of Article 5(1).
The AED 500 threshold is tested recipient by recipient and not on the company's total gifts.
Conclusion
The gifts provided to customers remain outside the scope of deemed supply because the AED 500 per recipient condition is satisfied.
The company is not required to account for output VAT, even though its total promotional gifts exceeded AED 40,000.
Scenario 2 – Each Recipient Receives Gifts Above AED 500, but total gifts Are Below AED 40,000
Facts:
ABC Trading LLC provides premium gifts to selected customers:
|
Recipient
|
Value of Gift
|
|
Customer A
|
AED 800
|
|
Customer B
|
AED 700
|
|
Customer C
|
AED 900
|
|
Customer D
|
AED 600
|
Total Value of gifts distributed: AED 3,000
Output VAT: AED 3,000 × 5% = AED 150
Analysis
Test 1 – AED 500 per recipient threshold
The first exception is not satisfied because:
- Customer A received AED 800
- Customer B received AED 700
Each individual gift exceeds AED 500.
Therefore, Article 5(1) does not apply.
Test 2 – Aggregate AED 2,000 output VAT threshold
The total deemed supply value is AED 3,000.
Output VAT: AED 3,000 × 5% = AED 150
Since AED 150 is below AED 2,000, the company satisfies the aggregate threshold under Article 5(2)(a).
Conclusion
Although each individual gift exceeds AED 500, the supplies are still excluded from deemed supply because the aggregate output VAT does not exceed AED 2,000.
Scenario 3 – Both Thresholds Exceeded
Facts:
ABC Trading LLC provides gifts as follows:
|
Recipient
|
Gift Value
|
|
Customer A
|
AED 5,000
|
|
Customer B
|
AED 10,000
|
|
Customer C
|
AED 85,000
|
Total Value of gifts distributed: AED 100,000
Output VAT: AED 100,000 × 5% = AED 5000
Analysis
Test 1 – AED 500 per recipient threshold (Article 5(1))
The exception is not satisfied because:
- Customer A received AED 5,000
- Customer B received AED 10,000
- Customer C received AED 85,000
Each recipient received goods exceeding the AED 500 limit.
Test 2 – AED 2,000 output VAT threshold (Article 5(2)(a))
The total output VAT on deemed supplies is: AED 5,000
Since this exceeds the AED 2,000 threshold, the aggregate exception is also not fully satisfied.
Key Learning Points
The table below summarizes the two relief mechanisms under the deemed supply UAE VAT exception rules:
|
Exception
|
Measurement Basis
|
Threshold
|
Example
|
|
Article 5(1)
|
Recipient level
|
AED 500 per recipient
|
Each customer's gifts must be checked separately
|
|
Article 5(2)(a)
|
Business aggregate level
|
AED 2,000 output VAT (equivalent to AED 40,000 value)
|
Total deemed supplies of the business over 12 months
|
Important Conclusion
The exceptions under Article 5(1) and Article 5(2)(a) of the UAE VAT Executive Regulation operate independently and are alternative tests, rather than cumulative conditions.
- If the value of goods supplied to each individual recipient within a rolling 12-month period does not exceed AED 500, the supply falls outside the deemed supply provisions under Article 5(1), irrespective of the Taxable Person's total deemed supplies.
- Conversely, where the AED 500 per-recipient threshold is exceeded, the supply may still qualify for the exception under Article 5(2)(a), provided the aggregate output tax on all deemed supplies made by the Taxable Person during the rolling 12-month period does not exceed AED 2,000 (equivalent to deemed supplies of AED 40,000).
Further, FTA Public Clarification VATP040 (14 March 2025) confirms that the AED 2,000 aggregate threshold provides marginal relief rather than an all-or-nothing exemption. Accordingly, where the aggregate output tax exceeds AED 2,000, only the amount of output tax exceeding AED 2,000 becomes payable, rather than the entire output tax on the deemed supplies. This reinforces that the two exceptions are intended to operate as independent relief mechanisms, and exceeding one threshold does not retrospectively affect supplies that already qualify for an exception under the other provision.
Accordingly, businesses should maintain:
- Recipient-level records to demonstrate compliance with the AED 500 per-recipient threshold under Article 5(1); and
- An aggregate rolling 12-month register of deemed supplies and the related output tax to monitor compliance with the AED 2,000 threshold under Article 5(2)(a).
Maintaining both sets of records will help substantiate the application of the relevant exception in the event of an FTA audit.
Maintaining robust recipient-level and aggregate records enables the business to substantiate the VAT treatment of deemed supplies and demonstrate compliance in the event the FTA reviews promotional or free-of-charge transactions.
