Government Entities and VAT
General Treatment
Government entities are generally not taxable persons for VAT purposes when performing their official functions (sovereign activities). However, they may be treated as taxable persons when engaging in commercial activities.
Sovereign Activities (Non-Taxable)
Government activities that are exempt/non-taxable include:
- Regulatory and administrative functions
- Defense and security
- Public order and justice
- Education provided by government schools
- Healthcare provided by government hospitals
Supplies made in the course of these activities are outside the scope of VAT.
Commercial Activities (Taxable)
When a government entity engages in commercial activities, it may be treated as a taxable person:
- Operating commercial facilities (e.g., government-owned hotels, transport)
- Selling goods or services on a commercial basis
- Licensing and franchising
If the government entity's commercial supplies exceed the registration threshold, it must register for VAT.
Supplies to Government Entities
When a registered business supplies goods or services to a government entity:
- The supply is subject to normal VAT rules (typically 5%).
- The government entity may or may not be able to recover the VAT (depending on whether it is registered).
- If the government entity is not registered, the VAT is a cost to the government.
Designated Government Activities
The Cabinet may designate specific government activities as outside the scope of VAT or as zero-rated. These are specified in the Executive Regulations and may be updated.
Worked Example
A Dubai government department purchases office furniture from a registered supplier for AED 100,000 + 5% VAT = AED 105,000. If the department is not registered for VAT (performing sovereign functions), it cannot recover the AED 5,000 VAT — it is a cost. If the department operates a commercial venture (e.g., a government-owned hotel), it may be registered and can recover the VAT.