A financial service will be exempt from VAT if the income earned by the supplier is by way of interest, a profit margin akin to interest or by way of an implicit margin.
The implicit margin condition is usually met
- when the supplier specifically seeks to generate income by actively trading an asset (e.g., money, securities, financial derivatives contracts, currencies) at a higher price than its acquisition price (e.g., realizing a spread, mark-up or profit),
- while bearing the risk of loss.
Financial services remunerated by way of an explicit fee, a commission or a discount generally do not involve trading an asset with the aim to generate a margin based on the asset’s trading price. They are typically triggered by the actual performance of a service by the supplier.
Financial services supplied in exchange for an explicit fee, a commission or a commercial discount are therefore subject to VAT at the standard rate of 5%.
Some services may be remunerated by way of both a fee and interest or implicit margin. For such services, each component of the remuneration will have its own VAT treatment:
- The fee will be subject to VAT at the standard rate
- The margin realized will be VAT exempt
Company A, a taxable person established in Bahrain, offers foreign currency exchange services to customers in Bahrain against payment of a commission. For each exchange service, Company A also realizes a margin, corresponding to the difference between the selling rate and the buying rate of the currency (i.e., the “spread”).
- The commission charged to the customers is subject to VAT at the standard rate of 5%
- The margin realized on the spread for each service is VAT exempt
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