Introduction:
The Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT law) governs the application of value added tax in the UAE along with its Executive Regulations (Cabinet Decision No 52/2017). Cryptocurrency mining taxation is becoming more important as cryptocurrencies increase in popularity in the UAE. The federal tax authority of the UAE has issued new guidance on how VAT shall apply to crypto mining under the VAT public clarification [VATP039]. This clarification mainly focuses on crypto mining done using the proof-of-work method. Popular cryptocurrencies, like bitcoin and other cryptocurrencies, fall under this category.
Article 1 of the VAT laws states that VAT is the tax imposed on the import and supply of goods and services at each stage of production and distribution, including the deemed supply. The term "taxpayer" refers to any individual who is required to pay tax in the state, regardless of whether they are a taxable person or an end consumer.
What is cryptocurrency mining?
Mining cryptocurrency is the process where specialized computers, also known as mining rigs, validate blockchain transactions for a specific cryptocurrency, for which a reward may be received for the contribution of computational power. In simple terms, if the individual sends or receives cryptocurrency, the transaction must be confirmed. To confirm this transaction, there should be a powerful computer called a mining rig to solve complex problems. This process is known as proof of work. When a miner successfully solves a problem, they add a new block of transactions to the blockchain and are rewarded with newly created cryptocurrency.
There are two types of mining: mining as a service and mining for an individual's account. Under the individual's account, they may receive rewards from the network while using their own equipment. However, this income is not guaranteed, and payment is only given once an individual resolves the problem. However, the mining as a service concept means an individual may allow others to use their devices, such as data centers or computing resources, in exchange for a payment. This type of mining is mainly considered a business transaction.
Crypto mining for personal use may not be classified as a business provider under UAE VAT regulation, and this type of service may not be subject to VAT as per Circular VATP039. There is no promise of compensation for the individual's contribution to the network, nor is there a direct customer. According to Article 1 of the VAT Law, a taxable supply must involve a distinct connection between payment and service. Since the reward comes from the network rather than a specific individual, the VAT does not apply to the mining for an individual's account.
On the other hand, the act of mining on behalf of another person is considered a taxable supply of services. In this case, there is a clear agreement, a recipient, and a payment present. The VAT law defines this type of service as taxable under Article 2(1). A VAT rate of 5% may be imposed on services provided to a customer within the UAE as per the VAT law. However, the supply may be zero-rated as long as the requirements specified in Article 31 of the Executive Regulations for the UAE VAT law are complied with.
When a UAE company is VAT-registered and receives mining services from a foreign company, it is obligated to implement the reverse invoicing method in accordance with Article 48 of the VAT law. If the UAE customer is not a taxable person, the foreign service provider is obligated to register for VAT in the UAE.
According to Article 54(1), the miner may recover input VAT spent on items such as mining equipment, power, and rent when mining as a service provider, as long as the VAT is used for taxable services and valid tax invoices are maintained.
Conclusion:
The UAE government has clarified the application of VAT to mining-related enterprises and individuals, as well as the capacity to reclaim VAT fees, through the implementation of VAT public clarification.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
