Guide to the Profit Margin Scheme under UAE VAT Law
Overview of the Profit Margin Scheme
The Profit Margin Scheme (PMS) is an optional VAT arrangement in the UAE designed to help eligible resellers reduce the VAT burden on certain goods by applying tax only on the profit margin, rather than the full selling price.
What are the Purposes and Benefits of the Scheme?
This scheme is particularly useful in preventing VAT cascading in cases where input VAT cannot be fully recovered. No prior approval from the Federal Tax Authority (FTA) is required to use the scheme, and it can be applied per transaction at the reseller’s discretion.
The scheme applies to goods that were previously subject to VAT and are sold under eligible transactions, such as purchases from non-registered persons, purchases from taxable persons who have also applied the Scheme, or goods where input VAT recovery is restricted under Article 53 of the VAT Executive Regulations.
Which are the Eligible Transactions and Goods?
Eligible goods include second-hand items suitable for reuse, antiques over 50 years old, and collectors’ items such as stamps, coins, currency, and objects of scientific, historical, or archaeological interest.
How is the Application to Imported Goods?
However, imported goods are not eligible for the scheme if the importer has recovered the VAT by claiming it in Box 10 of the VAT return. If the VAT on such imported goods is not recovered or is non-recoverable in accordance with Article 53 of the VAT Executive Regulations, then the scheme may be applied. Similarly, certain Article 53 goods can be sold under the Scheme if chosen, even if input VAT is blocked.
How to Calculate VAT Under the Scheme?
VAT under the Scheme is calculated by subtracting the purchase price from the selling price to determine the profit margin and applying the VAT fraction. No VAT is due if the goods are sold at a loss or without profit.
VAT Return Reporting and Tax Invoice Requirements
Businesses must report the selling price and the VAT on the profit margin in Box 1 of the VAT return and the purchase price in Box 9, while ensuring proper location-based reporting for UAE and non-UAE-established businesses.
Tax invoices must clearly state “VAT charged with reference to the Profit Margin Scheme” without showing the VAT amount, and all other invoice details must comply with standard requirements.
Record-Keeping and Notification Obligations
Resellers are also required to maintain accurate records, including a stock book, purchase invoices, or self-issued invoices for non-registrant purchases, and evidence that VAT was previously charged on the goods. The scheme should be notified to the FTA through Form 201 by selecting the Profit Margin Scheme checkbox.
What are the Key Advantages of the Profit Margin Scheme?
The main advantage of the PMS is the reduced tax burden, as VAT is paid only on the profit margin rather than the full value of the goods. At CLA Emirates, we assist businesses in navigating the complexities of VAT compliance, including understanding eligibility for the Profit Margin Scheme, issuing compliant invoices, accurately reporting under the Scheme, and handling input VAT claims.
Our team ensures that businesses remain informed and confident in their VAT processes, offering expert guidance for the smooth implementation of the Profit Margin Scheme.
Call for Consultation
CA Ajil Varghese | Associate Director - Indirect Tax
+971 54 2119 621
Ajil.Varghese@CLAemirates.com
