The Federal Tax Authority (FTA) of the United Arab Emirates has explained that ‘passively earned interest income' from bank deposits and dividend income are not subject to VAT in the UAE.
It is not necessary to include them in the VAT return.
“VAT is levied on the import and supply of products and services at each point of production and distribution, so VAT implications only occur when there is a supply – there is no VAT implication if there is no supply,” the FTA clarified.
Savings interest is tax-free in Dubai, Abu Dhabi, and the rest of the UAE, so this is a good place to start. Do your research if you want to save money in the UAE. Rates usually range from 1% to 4%, which is a significant difference, depending on how long you want to save, the currency you use, and how often you want to access your money. CBI provides a whopping 4% annual return on a Fixed Deposit account (subject to terms and conditions), the best we can find in the UAE at the time of writing, according to a quick comparison of UAE savings accounts. To gain the 4% rate, funds must be deposited in a fixed deposit with a minimum period of 37 months!
The vast majority of FDs in the UAE are short-term deposits with a lifetime of less than a year. Daily, monthly, quarterly, half-yearly, and yearly tenors are all possibilities. Each FD has a fixed interest rate (or benefit rate in the case of Islamic banks), which varies between banks and tenors.
Each lender will give you a different rate of interest, so not every monthly or quarterly FD will have the same interest rate. It goes without saying that you should choose the one that provides the best return.
Use compounding to your advantage.
You will withdraw your funds once your FD has matured. However, you should consider reinvesting the matured sum into another FD to get a better return.
This is because, due to the power of compounding, when the maturity sum is reinvested, the returns can be maximized.
So, if your bank provides interest reinvestment, take advantage of it. This is due to the fact that compound interest, whether paid monthly or quarterly, would usually increase the value of your term deposit. Although FD returns are tax-free in the UAE, inflation can have a substantial impact on the returns.