If a VAT-registered individual holds fixed deposits, recurring deposits, or any other type of bank deposit, he or she can earn interest income on those deposits.
Additionally, a VAT-registered person may earn dividend income by holding shares in a company.
In this Public Clarification, we discuss the VAT implications of interest income derived from bank deposits and dividends.
Earning interest passively on bank deposits does not qualify as consideration for a supply.
Similarly, dividend income received by merely holding shares in a company does not constitute consideration for a supply.
VAT is a tax imposed on the supply of goods and services, including deemed supplies, at every stage of production and distribution.
“Supply” is the foundation of VAT, and therefore, VAT implications arise only when there is a supply.
In other words, if there is no supply, there is no VAT implication.
Therefore, passive interest income from bank deposits and dividends are not subject to VAT and need not be reported in the VAT return.
Interest income from bank deposits
Deposits in banks may accrue interest to their holders.
For example, a retail business may put its business income into a bank account and earn interest on the deposited amount. Since the company does not do anything to earn this interest income other than depositing the money into the account, it can be said that it is passively earned.
As the bank doesn’t supply anything to the retail business in this case, the interest income received is not a consideration for a supply. This income is not taxed, so the retail business does not need to declare it on its VAT return.
Importantly, the above position only applies to interest derived from bank deposits and does not apply to interest on loans or credit, which are exempt supplies for VAT purposes.
Dividends are a distribution of profits by a company to its shareholders. Dividends are, however, not payable until the company declares them.
Dividend income can be earned simply by holding shares in a company. Whenever a company makes profits and declares profits, it pays a dividend to its shareholders. Dividends are paid to shareholders without the shareholder making any supply. Thus, dividends are generally passive income.
As the shareholder does not make a supply to receive the dividend, the dividend income cannot be treated as consideration for a supply.
Accordingly, dividend income is outside the scope of VAT, and is, therefore, not required to be reported on the VAT return.
While dividend income is generally not subject to VAT, any amount charged as a “management fee” would be. For example, management fees charged by a holding company to its subsidiaries would be subject to VAT.
Source: Federal Tax Authority