VAT on debentures obtained by Schools

Debentures are payments for allocation of seats in a school made by either corporate entity or by an individual. Generally, the following type of debentures are offered by schools:

• Corporate Debentures: This type of debenture is offered to an employee by a Corporate entity. A child covered by Corporate Debentures is directly offered a seat at the educational institute and they are not placed on the waiting list. This is an agreement between the Dubai Schools and the Corporate Entity. Consideration from such debentures are amortized over a period of time.
• Personal Debentures: When a personal debenture application is made, the applicant will be added to customized waiting list as per the application date and until the position is open and accessible. Consideration for such personal debentures is not charged before a position is offered to the applicant. Only once the applicant is offered a seat such debenture is purchased by the parents of the applicant.
• There are possibilities where consideration is kept as a refundable security deposit which is then refunded to the parents once the child/ applicant leaves the school.
• Also, discount is offered for additional applicants/ children where a family already holds certain number of debentures of an educational institution.

Considering that supply of educational services is zero-rated it is important to analyse the applicability of VAT on such consideration received by educational institutions.

• Corporate debenture – It may be considered as a supply of services but not educational services as this only relates to allocation of seats to the employees of a corporate. Additionally, it is important to note that such services should not qualify as ‘Financial Services’. In terms of UAE VAT laws, it may fall under the category of ‘Making available a facility or advantage’ As per the UAE VAT Laws, such services have not been classified as exempt or zero-rated and thus may be subject to VAT @5%.

• Personal debentures-Consideration is only paid upon admission and is refundable once the student leaves the education institution. Thus, one may consider that such debentures as deposits which are returned at the end of the tenure. Generally, deposits that are refundable in nature do not attract VAT.

Generally, VAT is payable as per the applicable date to supply provisions i.e. earliest of the following:

1. The date on which the provision of Services was completed.
2. The date of receipt of payment (or)
3. The date on which the Tax Invoice was issued.

Accordingly, VAT for consideration received for issuance debentures should be paid on earliest of the events i.e. either receipt of money or date on which a tax invoice is issued.

However, in some cases date of supply of service for such contracts may include either periodic payment or consecutive invoices for which the date of supply shall be earliest of any of the three following dates:

1. The date of issuance of any Tax Invoice.
2. The date payment is due as shown on the Tax Invoice.
3. The date of receipt of payment.

Provided that it does not exceed one year from the time of provision of such services.

Also, where applicable VAT is to be paid on value of such services. Considering the value given to school for debentures represent the value of services, such debentures should be subject to VAT @ 5%.

The applicability of VAT on debentures issued by schools depends entirely upon the terms and conditions as laid by the school while issuing such debentures.

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You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax.