VAT Treatment of Recharges, Disbursements & Reimbursements in the UAE

1. Overview of VAT Treatment of Recharges

The VAT treatment of recharges—also known as cost recoveries—is one of the most interpretative areas under UAE VAT. Although widely used in commercial arrangements, the term “recharge” is not defined in the legislation, making it essential for businesses to determine whether a recharge constitutes a supply of goods or services.

A typical recharge scenario involves three parties:

• Entity A supplies goods/services to Entity B
• Entity B incurs the cost
• Entity B recharges the cost to Entity C

VAT treatment may differ at each stage depending on:

• nature of the underlying supply
• whether the cost benefits the customer directly
• whether the supplier acts as agent or principal
• whether the recharge is at cost or includes mark‑up

2. Disbursements vs Reimbursements

A key challenge is determining whether the recharge is a disbursement or a reimbursement, as the VAT implications differ significantly.

Disbursements (Generally Not Subject to VAT)

A disbursement occurs when the supplier pays a cost on behalf of the customer, without deriving any benefit from the underlying goods or services. The supplier acts purely as an agent, passing the cost through without VAT.

FTA Public Clarification VATP013 outlines strict conditions for disbursements, including:

• the underlying supplier’s invoice must be issued in the customer’s name
• the supplier must act as agent
• the cost must be the customer’s responsibility
• no mark‑up
• customer must benefit from the underlying supply

Reimbursements (Generally Subject to VAT)

A reimbursement arises when the supplier consumes the goods or services and later recharges the cost to the customer. In such cases, the recharge follows the VAT treatment of the principal supply.

Courts in the EU and Saudi Arabia have considered factors such as:

• whether the customer received the benefit
• whether the customer knew the actual supplier
• absence of mark‑up
• whether the recharge is separate from the main supply

3. Standalone Supply vs Ancillary Supply

Another critical determination is whether the recharge is:

• a standalone supply subject to VAT at 5%, or
• an ancillary supply that follows the VAT treatment of the principal supply.

Example: Event Management Services

A UAE developer engages an event manager to conduct roadshows in the US. The event manager incurs costs such as hotels, artists, and brochures.

Key questions:

• Is the recharge an independent facilitation service subject to 5% VAT?
• Should hotel or real estate‑related costs (outside UAE) be treated as out‑of‑scope supplies?

Example: Air Ticket Bookings

If an entity books air tickets for another group entity and recharges the cost:

• Is the recharge a facilitation service subject to 5% VAT?
• Or is it ancillary to the underlying zero‑rated air travel?

Example: Real Estate – Bare Land

Bare land sales are VAT‑exempt. Developers often pay land‑related charges (e.g., DLD fees for additional floor space).

• If the landowner pays the fee and recharges it, is this a separate taxable supply?
• Or is it ancillary to the exempt bare land sale?

EU rulings suggest that if the land sale contract can be terminated for non‑payment of such charges, the fee may be considered part of a single supply.

4. Accounting Presentation Matters

Recharges may be recorded differently across businesses:

• as income/expense in the P&L
• as recoverable expenses in the Balance Sheet
• as expense reductions

Incorrect classification may cause finance teams to overlook VAT implications.

5. Relationship Between Entities

VAT treatment also depends on the relationship between the supplier and recipient:

• Head Office to Branch: Out of scope (same legal person)
• Entities within a VAT Group: Out of scope
• Intercompany transactions outside VAT group: VAT applies based on supply rules

Frequently Asked Questions (FAQ)