In a recent research by the Emirates NBD, UAE holds the second-largest position in the automotive market in the Gulf Cooperation Council (GCC). UAE Minister of Economy, Abdulla Bin Touq Al Marri, also stated that one of the most vital sectors for the future economy is the automobile industry.

The primary industrialization strategy of the UAE lies in the promotion of oil and gas industries. However, as a motive to expand their industrialization for a better, stable, and balanced economy, the automotive industry is the ideal long-term option. Further, it also prevents expensive imports and generates employment opportunities.

First and foremost, the sale of cars within UAE is subject to VAT at 5%. The sale transactions can be carried out by a variety of agreements. Let us understand the relevant VAT issues under different agreements of automotive sector in this article.


Outright Sale

Outright Sale is sale within UAE, wherein, the customer has resources available either in the form of cash or borrowed funds from financial institution for procurement of the vehicle. The VAT implications of outright sales are as follows:

(a) The date of supply is earlier of one of the following events:

  • the date on which the car is transferred to the customer;
  • the date on which the customer took possession of the car;
  • the date of receipt of payment; or
  • the date of issuance of tax invoice.


 Date of issuance of tax invoice 22-12-2021
Date of receipt of payment 29-12-2021
Date on which customer took possession 25-12-2021
Date on which car is transferred to the customer 28-12-2021

Date of supply in the above case is 22-12-2021.

(b)Where the contract for the sale of cars involves periodic payments or consecutive invoices, the date of supply is the earliest of any of the following dates provided that it does not exceed one year from the sale of the car:

  • the date of issuance of a tax invoice;
  • the date when the payment is due as shown on the tax invoice;
  • the date of receipt of payment.

It should be noted that where the date of supply is triggered because a payment is made or a tax invoice is issued in respect of a supply of a car, VAT will only be due to the extent of the payment made or stated in the tax invoice, and the remaining of the due tax on that supply will be payable as and when further dates of supply are triggered.

(c) A tax invoice must be issued within 14 days of the date of supply. The tax invoice must also be delivered to the customer. Also, it is pertinent to note that if any amount is charged as a disbursement for and on behalf of a Designated Government Entity (e.g., Transport Authority/Department) for provision of a Sovereign Activity, this amount should be clearly identified on the tax invoice and VAT should not be charged on this amount.

(d)The output tax must be reported in the VAT return of the tax period in which the date of supply is triggered.

Hire-purchase agreements

Hire-Purchase Agreement is a tripartite agreement involving two supplies for a VAT implication perspective. When a car is sold by a motor vehicle trader to a customer under such an arrangement, the first supply is by the seller, herein the Motor Vehicle Trader to the Finance Company, and another supply is by the Finance Company to the Customer.

Under the above said agreement, the ownership is at first transferred from the seller to the Finance Company, upon which tax invoice is being issued taking in consideration VAT on the sale price of the car. Later upon the payment of the final instalment by the customer, the ownership is transferred from the Finance Company to the Customer.

The invoice(s) raised by the Finance Company towards the customer consist of two parts i.e.,

  • the hire instalments which are liable to VAT and
  • the interest amount, exempt from VAT.

However, if the finance charge is included in the total amount payable by the customer in instalment, then the total amount will be liable to VAT.

 Mostly consecutive invoice(s) are issued by finance companies and in such a scenario the date of supply will be ascertained as discussed under the previous heading ‘Outright Sale’.

In case of repossession of cars sold

As we know that in a standard Hire-Purchase Arrangement, the ownership is being transferred to the customer at the completion of the hire term upon the payment of the full Hire instalments. But if in case the Finance Company repossesses the car supplied due to any reason before the final instalments are made then the right provided to the Hirer to use the car terminates. Such a repossession is not to be considered as supply for VAT implications. However, when the car is resold by the company to another buyer the usual VAT implications will apply.

In case the company has issued tax invoice(s) to the customer but is unable to collect the debt before repossession, it can adjust the tax liability as per the Bad Debt Scheme if the prescribed conditions are met.


A trade-in is an arrangement wherein a customer buys a new car by giving their old car as well as some money. Two distinct supplies take place for the purpose of VAT-

  1. The sale of the new car to the customer; and
  2. The customer’s sale of the old car to the motor vehicle trader

For computing the amount of VAT to be charged on sale of new car, the trader should not the trade-in value for the old car against the sale price of the new car.


Let us say the sale price of the new car is AED 1,00,000 and the trade-in value of the old car brought in by the customer is AED 40,000. Now, VAT shall be charged from the customer on AED 1,00,000 i.e., AED 5000 (without off the trade-in value)

The discussions above also applies to ‘trade-in over allowances’ which means that where the vehicle trader agrees to purchase at a price higher than the market value of the old car.


In the above illustration, let us assume that the trader buys the old car at AED 60,000 (i.e., AED 20,000 higher than the market value of the old car). In such a case also, the VAT shall be charged on AED 1,00,000.

Sale of cars to foreign governments, international organisations, diplomatic bodies and missions

VAT is applicable at 5% on sale of cars to foreign governments, international organisations, diplomatic bodies and missions, or an official thereof. However, the foreign governments, international organisations, diplomatic bodies, missions or an official thereof may, seek a refund of such VAT incurred under the special VAT refund scheme prescribed in the VAT legislation.

Sale of used/pre-owned cars

The provisions related to sale of used cars in UAE is also subject to VAT at 5%, provided the sale is made by a VAT registered supplier. A key differentiator between the sale of new and old cars from the perspective of VAT implication is the option given to motor vehicle dealers trading in used car to account for Profit Margin Scheme. However, all the provisions regarding date of supply, invoicing, payment of tax and price displays apply similarly to used cars as well.

In accordance with the Profit Margin Scheme, VAT can be accounted for on the difference between what was paid for a good at the time of purchasing it and what was charged to the customer at the time of selling it rather than accounting for VAT on the transaction value of such supplies.

The rationale for implementing Profit Margin Scheme is to avoid cascading of taxes. Where a used car is purchased from a non-registered person or from a VAT registered person who accounted for VAT by reference to the Profit Margin Scheme, the motor vehicle dealer is not able to recover the VAT as it is embedded in the purchase price and hence the situation of cascading of tax arises. Hence, this scheme is intended to eradicate this effect by allowing motor vehicle trader to account for VAT only on the profit earned on supply.

There are certain conditions which are required to be fulfilled for becoming eligible for applying Profit Margin Scheme:

  1. The car must have been purchased by the motor vehicle trader from a non-taxable person or from a taxable person who calculated tax on the supply by reference to the Profit Margin Scheme.
  2. However, as an alternative to condition (a), where the car is purchased from a VAT registered supplier, input tax credit must not have been recovered by reference to Article 53 of the Regulation.
  3. The car must have been subject to VAT before the supply in question. The FTA expects the motor vehicle trader to maintain documentation to evidence that the car was previously subject to VAT.
  4. The dealer must issue a tax invoice that clearly states that tax has been charged with reference to Profit Margin Scheme in addition to all other required information to be stated on a tax invoice with the exception of VAT amount.
  5. The dealer must keep the prescribed records and documents which includes:
  • A stock book or a similar record showing details of each car purchased and sold under the Scheme.
  • Purchase invoices showing details of the car is purchased under the Scheme. But where a car is purchased from a non-taxable person, the dealer must issue an invoice stating details of the car.

     6. The motor vehicle trader must inform the FTA that it has opted to account for VAT by reference to the Scheme via its tax return.

In reference to the above conditions which are required to be fulfilled to become eligible for the Scheme, there are however, two instances where the Scheme does not apply.

The first instance is where any stock on hand of used goods which were acquired prior to the implementation of VAT, or which have not previously been subject to VAT for other reasons. Such stock will not be eligible to be sold under the Profit Margin Scheme.

The second instance is where the purchase is made through import. This is because at the time of import, the importer will be able to recover the input tax. Accordingly, the sale of imported used cars in UAE is not eligible for the Scheme. However, if the import VAT was not recovered by the importer by reference to Article 53 of the Executive Regulation, the Scheme will continue to remain applicable.

The report titled “UAE Used Car and Auto Classified Market Outlook to 2025” by Ken Research recommended that:

the used car market in UAE is expected to grow further in the near future, with the increased awareness on health and hygiene followed by the onset of COVID-19, thus showcasing a change in consumer preference from availing public transport to private transportation medium. The market is expected to register a positive CAGR of 16.6% in terms of revenue during the forecast period of CY’20-CY’25.”

Lease of Car

Leasing of car is an alternative way of supply of car as compared to the traditional way of outright sale. The car may be leased for long term or short term depending on the need of the customers. In case of lease of car, the supply is also subject to VAT at 5%.

The VAT implications relating to date of date of supply, invoicing, payment of tax, are similar to that in ‘Outright Sale’ as discussed above.

Value of Supply for leased cars

The general rule to determine the value of supply applies to leasing of cars. The value of supply is the entire amount received or expected to be received for the lease of cars less the tax amount.

In the activity of leasing, there are various additional recoveries in form of fees or charges by the supplier, therefore, the different components should be considered and accounted for VAT accordingly.


A tourist leased a car from ABC LLC, a motor vehicle trader for four months. Salik (commonly known as toll tax) was being deducted from the vehicle’s account as the customer used it on the toll roads. As per the contract, cost of salik was to be recharged by the trader. Therefore, salik is subject to VAT and should be included in the value of the supply.

 Warranty Claims

A warranty service is a guarantee given by a manufacturer to his customer, undertaking to remedy any defects of the car due to faulty workmanship or materials for a specified period.

A customer has 2 options to avail warranty service:

  1. at the time of sale of the car (price for the warranty service is included in the price of the car); or
  2. separately from the sale of the car (price for the warranty service is charged separately).

In the former case, the cost of the warranty is included in the price of the car, the supplier undertakes to repair any defects in the car for a specified period free of charge. At the time of the original supply i.e., the sale of the car (including on the price for the warranty), the VAT would have already been accounted for and therefore no further VAT implications will arise at the time of providing the actual repair services. It is pertinent to note that the input tax incurred on carrying out the warranty repair services will be recoverable since it was incurred in the making of taxable supplies.

Whereas in the latter case, the warranty service is supplied for an extra charge, customer has an option to purchase an extended warranty for a specified period. The extended warranty is provided for a separate charge and the supplier undertakes to rectify any defect in the car during the additional period and does not charge any further amount to carry out actual repair services. The supply of an extended warranty is a taxable supply of services which is subject to VAT at 5%.


What would be the tax liability on the replacement of parts under warranty (where no consideration is charged from a customer)?

No VAT is chargeable on such replacement under warranty, as parts are provided to the customer without consideration. The costs to be incurred during the warranty period are included in the value of the supply made earlier.

Reimbursement of repair costs by distributors from manufacturers

 Where a distributor provides warranty services to a customer in the UAE, no VAT implications arise. This is because a distributor’s warranty for no extra charge is treated as a composite supply together with the vehicle sold on which VAT has already been accounted for at the time of the original sale. It should be noted that warranties are typically provided by the car manufacturers. Where a distributor is involved in the supply chain, the manufacturer’s warranty is essentially passed on to the end customer.

Further, it is equally important to emphasize that reimbursement of repair cost by UAE distributor from overseas manufactures is subject to VAT at 5%. This is because the pre-requisite for treating the supply as a zero-rated export of service (i.e., the service must not be supplied directly in connection with goods situated in the UAE) is not met.


Another agreement for sale of cars is sale at auctions. Auctions are places where goods are sold to the highest bidder. In such agreements, the auctioneer could be the owner / principal seller of the cars, however majorly auctions conducted by the auctioneer acting as an agent on behalf of other persons selling their cars.  

Let us understand the VAT treatment of auctions depending on whether the auctioneer is acting as a principal supplier or as an agent on behalf of the principal supplier.

Category of Sale         Brief Explanation Tax Treatment
Auctioneer acting as the principal supplier

(‘arrangement is undisclosed agency’)

Auctioneer owns the car and sells it in the auction. Auctioneer makes the supply of goods. Where auctioneer is registered under VAT – @ 5% on  the supply (unless the conditions of zero rating are met on exporting the cars)

If unregistered – it must evaluate whether VAT registration obligations have arisen on account of the supply

Auctioneer acting as an agent of the principal supplier

(‘arrangement is disclosed agency’)

Auctioneer does not own the car but simply provides the marketplace and assistance in the process of selling the cars belonging to others through the auction. The supply may either be standard-rated (if the principal supplier is registered for VAT), zero-rated (if the principal supplier is registered for VAT and the  car is exported from the UAE) or outside the scope of VAT (if the principal supplier is  not registered and not required to register for VAT) depending on the facts of the sale.

The principal supplier shall comply with the tax.

Issuance of tax invoices by auctioneer on behalf of the principal supplier

A VAT-registered agent which makes a supply on behalf of a VAT-registered principal supplier may issue their own tax invoice in respect of the supply with the particulars of the agent, as if that agent had made the supply of goods or services itself. However, a reference with regards to the principal supplier viz. its name and TRN should be made in the invoice. In case the auctioneer does not issue a tax invoice on behalf of the principal supplier, there is no such requirement for issuance of invoice by the principal supplier.

Further, the principal supplier remains responsible for accounting of the VAT on the supply and comply with all the tax obligations in respect of the supply.

Commission Charged by Auctioneers

Commission and/or premium is consideration for a taxable supply by the auctioneer for the auctioning services and therefore liable to VAT @5%.

Few miscellaneous arrangements

 Free Promotional Gifts

Various promotional gifts are offered by the trader on sale of cars free of any charge. In case the trader recovers the input tax on purchase of gifts and in turn supplies them free of any consideration the supply will be subject to deemed supply provisions. However, where the trader does not recover any input tax on the purchase, the deemed supply provisions will not apply.


Additionally, the trader also provides discounts on the sale price of the cars. In such case VAT is applicable on the discounted value charged from the customer. The motor vehicle must separately mention the discount offered in order to account for VAT only on the discounted value.

Discounts are also offered to the motor vehicle dealer in the form of volume discounts/bulk discounts/performance discounts. Such discounts encourage the distributor to increase sales and achieve targets. Where such discounts are provided by the manufacturer, the manufacturer should clearly depict the discount in the invoice. For discounts based on achieving sales target, the manufacturer should issue a credit note to reduce the value. On the other hand, the motor vehicle dealer may raise a tax invoice and charge VAT at the appropriate rate if the discount is received on the basis of a specific activity.


A manufacturer sells a car to MNO LLC for AED 5,00,000 offering a 5% discount for purchase of 10 or more cars. To encourage prompt payment, manufacturer offers additional 1% discount if MNO pays within 7 days.

Value of cars   – AED 50,00,000

Discount (at the time of sale)- AED 2,50,000

Value on which VAT to be paid- AED 47,50,000

Further discount of additional 1% is not accounted at the time of sale but will be considered if payment is received within 7 days and therefore the manufacture can issue a credit note for the same.


Demo cars

For test drive experience and showcase, the motor vehicle trader often displays demo cars. While other cars are sold at the original sale price, demo cars cannot be sold at the same value and therefore, manufacturer agrees to a reduction in the original sales price. Considering this as

discount, the manufacturer may issue a credit note for such reduction.

Other important points

 Company cars

The input tax credit is blocked if the company cars are available for the personal use of its employees. Also, incidental expenses such as insurance, maintenance, servicing, related to such car cannot be recovered.

Price Display

Motor vehicle traders display their cars in their exclusive showroom for a customized boutique experience for the customer. It is equally important to deliver right information to the customer in terms of prices and varied other taxes and for that reason the traders should display, advertise publish or quote the VAT inclusive prices. Let us say, if a car is priced at AED 2,00,000 and the applicable VAT is AED 10,000, the trader must advertise the same at the price inclusive of VAT i.e., AED 2,10,000.

However, in the following two instances the trader is no required to advertise the price inclusive of VAT, rather it is advised to clearly specify the VAT exclusive prices-

  • Where the supply is meant for export.
  • Where the customer is registered under VAT.


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