An option or a financial option, gives the buyer a right to buy or sell an underlying financial instrument at a specified price prior to or on a specified future date. The specified price is known as the strike price and is set with reference to the spot/market price. This strike price can be at a premium or at discount to the spot price. The right to buy an underlying financial instrument at a specified price on a predetermined date is called Call option, and the right to sell an underlying financial instrument at a specified price on a predetermined date is called Put option. Option premium is the fee for selling/ buying an option
As per Executive Regulation (ER) of the VAT Law, the issue, allotment or transfer of ownership of an equity security or debt security is exempt from tax. In a clarification vide circular No.: VATP014 issued by the FTA it is also made clear that supplies of options in respect of debt securities and equity securities in return for premiums are exempt from VAT. However, supplies of options in respect of underlying commodities or other non-debt and non-equity instruments –in return for explicit premiums is taxable.
Options under the context of debt or equity security will qualify as “Exempt financial services”, hence exempt from VAT. If a supplier has paid a VAT tax of 5% on such transaction before 31 st of July, 2019, then a credit note for the same is to be issued to the recipient. Output tax on such options which has been accounted for on a prior VAT return can be adjusted by the supplier in the VAT return for the period in which the credit note was issued.
Similarly, a recipient that has already deducted input tax related to such a supply and receives a credit note to correct the VAT treatment would have to negatively adjust the input tax in the tax return for the tax period in which the tax credit note was received.