VAT Treatment of Options & Option Premiums
Introduction to Options and Option Premiums
In today’s business world, companies use different financial tools. An Option gives a right to buy or sell a financial asset. The asset can be a debt security, equity, or even a commodity. Companies pay or get an agreed price, called the Option premium, when they trade these rights. You need to understand the VAT rules for these transactions. This helps you avoid mistakes with VAT returns and stay compliant.
What Is an Option and an Option Premium?
An Option means a company or a person can buy or sell a financial product at an agreed price. The agreement always includes a time limit. The thing you can trade may be a share, a bond, or sometimes a commodity. If you receive money when you sell the right, that money is called the Option premium. This amount becomes important when you calculate VAT in the UAE.
Key Points:
- An Option gives a right to buy or sell.
- The asset can be shares, bonds, or commodities.
- The Option premium is the money received for the Option.
VAT Rules for Option Supply
The UAE has set clear VAT rules for Options. If you sell or buy Options linked to debt or equity securities, these are exempt from VAT. This means the seller does not charge VAT, and the buyer does not pay VAT on these transactions. If you handle Options related to equity or debt, you should follow the VAT exemption.
Example:
If a company sells an Option to buy shares, that transaction is exempt from VAT. The law does not require you to add VAT to the Option premium in this case.
Remember:
- Options for shares and bonds: VAT-exempt
- No VAT charged on the Option premium in these cases.
When Does VAT Apply to Option Supply?
VAT exemption does not always cover every Option. If you trade Options where the asset is not debt or equity—like a commodity—VAT applies. You need to add VAT to the Option premium. The VAT rate may be standard or zero based on the deal.
Example:
If a company sells an Option for a gold bar, VAT applies. The seller must charge VAT on the premium.
Points to Remember:
- VAT applies to Options for non-securities (commodities, other assets).
- The seller adds VAT to the Option premium.
Fixing VAT Mistakes by the Option Supplier
Sometimes, a supplier charges VAT by mistake on an exempt Option. When this happens, the supplier should issue a tax credit note to the buyer. The credit note corrects the error by reversing the VAT amount. The supplier must report this adjustment in the VAT return for that period. It is important to keep all records about this correction.
Simple Steps:
- Find the mistake.
- Issue a tax credit note to the buyer.
- Report the correction in your VAT return.
- Keep all documents for proof.
Correcting VAT Mistakes by the Recipient
If you’re a recipient and receive a tax credit note, you must fix your side too. If you already claimed input VAT, you need to make a negative adjustment in the same VAT period as the credit note. This cancels out the wrong VAT claim you made earlier.
How to Do It:
- Get the tax credit note.
- Adjust your VAT return for that period.
- Remove the wrong input VAT you claimed.
Why Trust Mubarak Al Ketbi (MAK) Auditing?
Mubarak Al Ketbi (MAK) Auditing knows UAE VAT rules very well. Our team works with many clients on VAT for Options and premiums. We help companies fix VAT issues and stay compliant with new laws. Our expert team gives you clear guidance and strong support.
We Provide:
- VAT advisory for Options and premiums
- Error correction and compliance checks
- Personalized help with tax notes and adjustments
- Updates about new VAT rules
Contact Mubarak Al Ketbi (MAK) Auditing
- For more information, visit our office at Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Or contact/WhatsApp us at +971 50 276 2132
