UAE VAT Updates – VAT Public Clarification on zero-rating of export of services
Following Cabinet Decision No. 46 of 2020 to replace the words “or” by “and” in Article 31(2) of Executive Regulations to the VAT Law (“Regulations”), the UAE Federal Tax Authority (“FTA”) published a VAT Public Clarification on the zero-rating of export of services (“Public Clarification”).
According to the Regulations, the export of services would be zero-rated subject in the following conditions specified under Article 31(1)(a)(1) of the Executive Regulations:
- the services are supplied to a recipient who does not have a Place of Residence in the UAE; and
- who is outside the UAE at the time the services are performed.
Under Article 31(2) the recipient is considered as being “outside the State” if
- they only have a short-term presence in the State of less than a month; and
- the presence is not effectively connected with the supply
In the context of the update in Article 31(2) of the Regulations, the FTA provides it’s interpretation of ‘Place of Residence of the Recipient” and “Location of the Recipient” through the Public Clarification.
Place of Residence of the Recipient
As clarified by the FTA, a recipient of services may have the place of residence in the UAE if it has either of the following in the UAE:
- Place of establishment – the place where the recipient is legally established, in which significant management decisions are taken, or central management functions are conducted; or
- Fixed establishment – any fixed place of business in which the recipient conducts business regularly or permanently and where sufficient human and technology resources exist to enable the recipient to supply or acquire goods or services, including the recipient’s branches.
It may be a case that a recipient has several different establishments in different countries; as an example, a recipient may have a head office (i.e., a place of establishment) outside the UAE and a branch (i.e., a fixed establishment) in the UAE. In this case, the establishment most closely related to the supply of services must be determined.
Where group companies benefit from supplied services from multiple locations (i.e., in the UAE and outside the UAE), the supplier should identify the establishment that is most closely related to provided services by considering the facts of each case taking into consideration the following:
- which establishment is the contractual recipient of the supply;
- which establishment is actually benefiting from the supply;
- which establishment will receive the invoice and make payment for the supply;
- which establishment provides instructions to the supplier; and
- whether the services are related to the business being carried on by the recipient through an establishment in a particular country.
Location of the Recipient
As per the recently updated Regulations, the zero-rated relief for the supply of services is not applicable when the recipient is present in the UAE at the time the services are performed, and that presence is directly connected to the supply.
Interpreting the second condition, FTA stated that it is necessary to consider whether the recipient has any physical presence in the UAE at the time the services are performed. This anlaysis requires consideration of the nature of the services supplied and the period or duration during which the services are performed by the supplier and consumed by the recipient.
The Recipient shall be considered as being outside the UAE if there is only a short-term presence in the UAE of less than a month. Public Clarification requires that only the physical presence of the recipient during the period or periods in which the supplier performs services and the recipient consumes them needs to be taken into account; the location of the recipient before and after the performance and consumption of the services should not be taken into account.
The FTA highlights that when determining the location of the recipient, only the establishment most closely related to the supply should be considered. This means that if a recipient has both UAE and overseas establishments, and the overseas establishment is most closely related to the supply, the condition that the recipient is outside the UAE is still satisfied, though the recipient also has a UAE establishment.
In this regard, the FTA provides several practical examples that may be helpful for UAE-based suppliers in determining the taxability of services provided:
Example 1. Where a non-resident recipient of litigation assistance services relating sends its representative to the UAE to be present during the hearing, the UAE-based supplier would not be able to zero-rate the service as the client was physically present in the UAE at the time the UAE-based supplier performed the services
However, if the non-resident’s employee comes to the UAE for the reason that is not related to the ongoing litigation (conference, tourism, etc.), a recipient would still be considered to be outside the UAE, and hence the supply of services would qualify for zero-rated relief.
Example 2. If an overseas individual appoints the UAE supplier for assistance with due diligence on a company he is interested in investing in, the said individual comes to the UAE on a week-long holiday during the due diligence project, the supply of services provided by the UAE supplier would still be qualified for zero-rated relief given the fact that the individual does not visit the UAE company premises or meet with its employees.
Since zero-rating is the relief from the default VAT rate, a supply should only be zero-rated where the supplier can ascertain that all of the above-described conditions are satisfied.
Following the release of the Public Clarification, the FTA expects all businesses to review its transactions, agreements, additional information of customers to whom they export services to carefully analyze whether criteria for zero-rating the export of services are satisfied and ensure that appropriate supporting evidence is maintained—failing such analysis, the supplier would face the VAT of 5% on the supply as well as late payment penalties up to 300%.
How can we help?
Rethink as an entity provides VAT advisory, optimization, registration, implementation, compliance, and training services in Bahrain, UAE, KSA, and the GCC.
Our team of senior qualified tax advisors, finance experts, and tax accountants are happy to provide practical help and advice, to ensure timely and cost-effective VAT services.
Based on our local and international experience, we understand that VAT is a complex tax and would certainly suffer numerous changes in the upcoming years. Rethink’s VAT services are aimed to suit both basic and complex returns for SMEs and larger enterprises.
Senior Manager (Indirect Tax)
Assistant Tax Manager