Charities and VAT
General Treatment
Charities and non-profit organizations are generally treated as taxable persons if they make taxable supplies above the registration threshold. However, certain supplies by qualifying charities are outside the scope of VAT.
Qualifying Charities
A qualifying charity is one that is:
- Established for public benefit (not for profit)
- Licensed or approved by the relevant UAE authority
- Not carrying on a business
Outside the Scope Supplies
Supplies made by qualifying charities in the course of their charitable activities are outside the scope of VAT:
- Donations and grants received (not consideration for a supply)
- Free distribution of goods to beneficiaries
- Free services to beneficiaries
Taxable Supplies by Charities
When a charity makes taxable supplies (e.g., selling merchandise, charging fees), it may need to register for VAT if supplies exceed the threshold. VAT applies to:
- Sale of merchandise
- Fundraising events with entry fees
- Commercial activities
VAT Recovery by Charities
Qualifying charities may be able to recover VAT on purchases related to their charitable activities through a special refund mechanism, even if they are not registered. This is similar to the government entity refund mechanism.
Donations
Donations and grants received by a charity are not consideration for a supply and are therefore outside the scope of VAT. The charity does not charge VAT on donations received.
Worked Example
A UAE charity receives AED 500,000 in donations (outside scope — no VAT). It distributes AED 400,000 of food and clothing to beneficiaries (outside scope — no VAT). It sells AED 100,000 of merchandise in its charity shop (standard-rated at 5% — AED 5,000 output tax). If the charity is registered, it can recover input tax on purchases related to the merchandise sales. It may also seek a refund of VAT on purchases related to its charitable activities.