VAT Claim on Family Insurance

In UAE providing insurance to employees is considered an employer’s responsibility. In most of the cases, it is a legal responsibility to provide health insurance to all employees. However, in certain emirates (e.g. Abu Dhabi), providing health insurance to the family of the employees is also the employer’s responsibility. In other cases, where family insurance is not a legal responsibility, a company may still provide the same as a company policy.

According to UAE VAT laws, health insurance is subject to 5% VAT. However, claiming the input VAT on employee-related insurance expenses may not be straightforward. Where the health insurance is provided by an employer to an employee as a benefit which is part of a contract of employment or as a legal responsibility, the employer will be able to recover the input tax on such products, subject to the usual rules of VAT recovery.

Where an employer provides health insurance to the family of the employee, input tax will only be recoverable if there is a legal obligation to provide the insurance to the family members. For example in Abu Dhabi, where it is a legal responsibility to provide health insurance to family members of the employee, the company can claim the input VAT on such family insurance expenses. While in Dubai as providing family health insurance is not a legal responsibility, therefore input VAT on such family insurance expenses may not be recoverable in Dubai.

The reason for this is that Article 53 of the Executive Regulations dealing with blocked input tax envisages that costs incurred for the personal benefit of employees (which health insurance would be), will only be recoverable where:

  1. It is a legal obligation to provide those services or goods to those employees under any applicable labour law in the State or Designated Zone.
  2. It is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people.

It is important to understand that where family health insurance is a contractual obligation, then it must also be required in order that the employee may perform their role. It is not the case that an employee requires their family member to have health insurance in order that the employee may perform their role, and on that basis, the input tax on health insurance provided to families (unless it is a legal obligation) should not be recoverable. In contrast, where the law stipulates that the employee’s family members must be provided with health insurance, this would be dealt with under 1 above and the input tax incurred by the business would be recoverable.

If any company has claimed excess input VAT and file the return on that basis where it was not supposed to be recoverable, it will be considered as an error and must be rectified within 20 days of finding such error.

Note: To get any further advice on VAT related matters, you may contact at +971-4-4370704 or drop a line to info@LynchpinConsulting.com