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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

  1. 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),
  2. 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

Example:

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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The entire contents of this article is solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation.. It doesn't constitute professional advice or a formal recommendation. The author has undertook utmost care to disseminate the true and correct view and doesn't accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information's provided herein above.

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