UAE VAT Update: Profit Margin Scheme Guidelines

The Federal Tax Authority (FTA) in the United Arab Emirates has released a comprehensive UAE VAT Guide on the Profit Margin Scheme(VATGPM1). This guide provides long awaited clarity for VAT registered business dealing in second-hand goods, antiques, and collectors’ items, and Article 53 goods where input VAT is restricted.

The objective of the scheme is to reduce VAT cascading in situations where goods have already been subject to VAT in the supply chain or where input tax recovery is restricted. Under this VAT mechanism, resellers of eligible goods account for VAT only on their profit margin rather than the total selling price.

If your business requires assistance with the new Profit Margin Scheme, our VAT consultants in Dubai are here to guide you. This article covers the Profit Margin Scheme’s eligibility, VAT calculation methods, and next steps for affected taxpayers as per UAE FTA guidelines.

Overview of the UAE VAT Profit Margin Scheme

Under standard VAT regulations in the UAE, VAT in the UAE is calculated on the entire selling price of the goods. The Profit Margin Scheme permits VAT to be charged only on the profit margin, defined as the difference between the purchase price and the selling price of the goods.

This approach helps reduce VAT liabilities and prevent VAT cascading where input VAT recovery is restricted. VAT in the UAE under the scheme is calculated using the VAT rate applied to the profit margin as per the UAE FTA.

This scheme is optional and may use its selectivity on individual eligible transactions. However, businesses must meet the prescribed eligibility conditions and maintain proper records to support the application of the scheme.

Eligibility Conditions for Applying the UAE VAT Profit Margin Scheme

The VAT Profit Margin Scheme may be applied only in specific scenarios, and where all prescribed conditions are met. The scheme is available in the following situations:

• Eligible goods are purchased from a non-VAT registered person or from another VAT registered reseller who has applied the profit Margin scheme to that supply.
• Goods are sold for which input VAT recovery is restricted or blocked under Article 53 of the UAE VAT Executive Regulation.
• The scheme applies to goods that have previously been subject to UAE VAT within the supply chain.
• The Profit Margin Scheme does not apply to imported goods where input VAT is recoverable. It may be used where import VAT received is blocked under Article 53.
• VAT-registered resellers must elect the Profit Margin scheme through the UAE VAT return and ensure that VAT is not explicitly shown on the tax invoice.

Benefits of the UAE VAT Profit Margin Scheme

The UAE VAT Profit Margin Scheme offers several key advantages for VAT-registered businesses dealing in eligible goods:

• Lower VAT Liability
• Ensure UAE VAT compliance
• Improved business Cash Flow
• Efficient VAT Management for resellers

Goods Covered Under the UAE VAT Profit Margin Scheme

The Profit Margin Scheme under UAE VAT applies exclusively to goods that were previously subject to VAT and fall within designated categories defined by the UAE FTA. The eligible goods include:

Category	Description	Examples
Second-hand goods	Tangible moveable goods that can be reused or repaired, retaining their essential characteristics	Used cars, mobile phones, electronic devices, and furniture. Non-usable scrap is excluded
Antiques	Goods over 50 years old, retaining historical or artistic value	Artworks, vintage furniture, collectible artifacts. Proof of age and previous imposition of VAT required
Collectors’ items	Goods of rarity or historical or cultural value, prized by collectors	Stamps, coins, historical documents, and archaeological objects. Documentation and evidence of previous imposition of VAT required
Goods with restricted input VAT	Goods where input VAT recovery was blocked under Article 53 of the VAT Executive Regulation	Resellers must retain proof showing that VAT was not recoverable.

 

Points to Note: Imported goods are generally excluded unless import VAT is non-recoverable under Article 35 of the UAE VAT regulations. To apply the Profit Margin Scheme, as per UAE FTA regulations, resellers must keep evidence that VAT was previously imposed on the Goods.

Conditions for Using the UAE VAT Profit Margin Scheme

The UAE VAT Profit Margin Scheme is optional and can be applied on a per-transaction basis by VAT registered business in Dubai and across the UAE. No prior approval from the Federal Tax Authority is needed. Once VAT is explicitly shown on an invoice, the VAT PM scheme cannot be applied to those transactions.

To apply the scheme correctly, resellers in the UAE must:

• Generate a tax invoice referencing the profit margin scheme, which does not separately display VAT
• Keep supporting evidence of proper VAT treatment for compliance
• Declare your election when filing the UAE VAT return with the FTA

Failure to meet any condition may invalidate the application of the scheme and result in hefty penalties under UAE VAT laws. If the Profit Margin Scheme is not applied, businesses must follow standard UAE VAT rules and charge VAT on the total selling price.

How UAE VAT Is Calculated Under the Profit Margin Scheme

The UAE VAT Profit Margin Scheme allows VAT to be charged only on the profit margin, not the full selling price. Here’s how it works:

1. Calculate The Profit Margin

Profit Margin = Selling Price − Purchase Price

2. Determine the VAT Amount

VAT is calculated using the VAT fraction.

VAT = Profit Margin × 5 ÷ 105

Or

VAT= Profit Margin ÷ 21

• If goods are sold at a loss or break even, no VAT is due.
• Losses cannot be offset against profits from other sales.

Point to Note: Under the Profit Margin Scheme, VAT is calculated directly from the profit margin, as the margin is considered as inclusive of VAT portion. It is not be added on top of the selling price.

Record-Keeping and Invoicing for the UAE VAT Profit Margin Scheme

To comply with UAE FTA guidelines, resellers applying the Profit Margin Scheme must maintain proper records and invoices. Key documents include:

1. Keep the stock register updated to track all goods purchased and sold.
2. Keep evidence that VAT was previously applied to the goods
3. Retain the purchase invoice for goods purchased under the VAT PM scheme
4. If goods are purchased from non- VAT registrants, a self-issued invoice must be prepared to evidence purchase price, showing the below:

• Reseller’s name, address, and TRN
• Seller’s name and address
• Date of purchase
• Description of the goods
• Purchase price/consideration
• Signature of the seller or authorized representative

UAE VAT Return Filing for Profit Margin Scheme

When filing your VAT201 return in the UAE under the Profit Margin Scheme, ensure compliance by:

• Indicating that the scheme is applied
• Reporting the selling price net of VAT in Box 1
• Reporting VAT on the profit margin in the VAT column
• Reporting the purchase price in Box 9 with no VAT in the VAT Amount column.
• Ensure all transactions are reported as per the applicable tax period and the Emirate of establishment.

Partnering with Jaxa’s VAT advisors in Dubai and across the UAE helps businesses accurately report under the scheme, avoid errors, and stay fully compliant with UAE FTA requirements.

Key Actions the business must do Next

To comply with UAE VAT as per Profit margin Scheme:

• Ensure compliance with the scheme as per UAE FTA guidance
• Strengthen  VAT documentation
• Update VAT invoice control and ERP configuration
• Optimize UAE VAT return processes
• Upskill finance and sales teams on PMS rules
• Perform an audit on past resale transactions
• Review the eligibility of goods and check VAT status
• Seek VAT advisory assistance before applying the scheme.

Taking proactive steps will reduce penalties and protect cash flow.

How Jaxa Auditors Supports clients in UAE VAT Compliance

Navigating the UAE VAT Profit Margin Scheme requires a strong understanding of UAE VAT regulations and practical implementation expertise. Partnering with a trusted VAT consultant in the UAE, such as Jaxa Chartered Accountants, a UAE FTA-approved tax agent and a leading accounting and auditing firm in the UAE, helps resellers apply the scheme accurately while remaining fully compliant with UAE Federal Tax Authority guidelines. We have assisted numerous clients in implementing VAT rules and confidently respond to UAE FTA audits.

Our VAT services in the UAE include:

• VAT registration and deregistration in the UAE
• UAE VAT return filing and preparation
• VAT consultant and advisory services
• End-to-end Profit Margin Scheme setup and compliance

Stay compliant, stay protected, and stay ahead with Jaxa’s VAT expertise.

From VAT PMS implementation to VAT return filing, Jaxa Auditors turns complexity into confident compliance.

Book Now for a Free Consultation with Jaxa to adopt PMS confidently and future-proof your VAT compliance.