VAT treatment on asset financing

Businesses often purchase assets and pay in installments. The installment payment may or may not be subject to charges.

In the case of asset financing, credit facility or financing service are provided to the customer purchasing assets and a separate charge is made for the financial service provided.

What are the different types of asset financing products?

Asset financing products may generally take the form of:

1. 1. Credit Sales
   2. Conditional sales
   3. Hire-purchase and finance lease.
   4. Operating leases

In the case of credit sales the asset become the property of the customer, even though the payment is made in installments, but for conditional sales, Until payment is made in full and/or any other conditions by the customer are met, the goods remain the property of the seller even though the acquisition price of the goods is payable by installments.

However, in the case of a hire-purchase and finance lease, the asset is hired by the lessee and periodic payments are made. The asset remains the property of the lessor with the lessee having the right to purchase the asset. However, the lessee bears all the risks and costs associated with the asset.

In the case of an operating lease, the lessor acquires the right to use the asset without ownership and the lessee does not possess the right to purchase the asset. Operating leases are generally considered a financing arrangement.

What are the different types of financing arrangements used by the suppliers?

The suppliers use one among the following financing arrangement to facilitate financing arrangements to its customer against the supply of assets:

1. Self-financing arrangement: In such an arrangement, the supplier himself offers a financing arrangement to its customer for the purchase of the assets. Hence, there are two transactions from a VAT point of view:
   1. Supply of goods by the supplier to customer
   2. Supply of financial service or credit facility by the supplier for a separate charge.

2. Third-party finance arrangement: In this case, a bank or a finance company takes the ownership of the assets from the supplier of the asset and supplies the assets to the customer. Hence, there are three transactions taking place from a VAT point of view:
   1. Supply of assets by the supplier to the bank or the finance company as per the agreed price.
   2. Supply of assets by the bank or the finance company to the customer as per the agreed price by the customer and supplier.
   3. Supply of financial service or credit facility by the bank or the finance company to the customer for a separate charge.

What is the VAT treatment on the supply of assets under financing arrangement as per the Bahrain VAT law?

The supply of assets is considered a one-off supply despite the fact that the repayment will be made in installments. Goods supplied in Bahrain are subject to VAT at the standard rate of 10% unless they fall within the scope of zero-rating or VAT exemption provisions.

The VAT due date on supply of assets would be the earlier of the below:

1. 1. When the goods are made available at the disposal of the customer or the bank or financial institution (in case of third-party financing arrangement). OR
   2. On the issue of a tax invoice to the customer or bank or financial institution by the supplier. OR
   3. When payment is made against the asset by the customer or bank or financial institution.

In case, if it is a third-party financing arrangement, the dealer should issue a tax invoice to the bank when the asset is supplied to the bank and the bank should issue a tax invoice when the asset is supplied to the customer.

However, it is important to note that in both cases, no VAT should be charged on the installment payment made by the customer. This is because the whole purchase amount is subject to VAT when either of the above-mentioned conditions is met.

The total taxable value will be the price of goods as stated in the sales agreement.

What is the VAT treatment on the supply of the financing service under financing arrangement as per the Bahrain VAT law?

Interest charged on the financing arrangement will be treated as an exempt supply and charges on services levied by the bank or financial institution or the supplier will be subject to VAT at 10%.

What is the treatment of fees or charges levied by the supplier or bank for providing the financing arrangement?

The bank or the supplier might charge some fees like the application fee or documentation fee. These are subject to VAT at 10% in Bahrain unless the conditions to apply the zero-rate of VAT (for export of services) are specifically met.

However, please note that the VAT on such fees charged by the supplier to the bank or financial institutions should not be recovered by the bank as Input VAT unless it can be recovered if the bank recharges the fees to the customer.

VAT treatment on the agency or intermediary fees charged by the bank.

Often the dealer or supplier of the asset charges intermediary or agency fees to the bank for introducing the customer to the bank or the financial institution. They are regarded as financial services and follow the general place of supply rules applicable to services. From a VAT point of view, it is subject to VAT at 10% unless the conditions to apply the zero-rate of VAT (for export of services) are met. VAT charged by the dealer on these fees/commissions should not be claimed by the bank or finance company since they are used to perform VAT exempt financing.

Our Tax Experts in Emirates Chartered Accountants Group Bahrain believe in a proactive approach to tax advisory services with a cost-effective and tailor-made option that is preferred by businesses all over. Our team of professionals is well versed in the Bahrain VAT Law as well as the UAE VAT Law  They are also equipped with practical experience in implementing VAT in UAE and VAT in Bahrain.

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• VAT Registration in Bahrain
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