Zero – Rating of Export of Services (VATP019)
The Federal Tax Authority has published public clarification regarding the Zero – Rating of Export of Services (VATP019), explaining the conditions prescribed under article 31 of the UAE VAT Executive Regulations. A significant part of the regulation is that a supply may be Zero – Rated if the service recipient does not have a place of residence in UAE and outside UAE when service is performed.
In order to determine whether the conditions are met, the supplier must consider all available facts, including the residency status and location of the recipient. If the recipient has multiple establishments, the supplier should identify which establishment of the recipient is most closely related to the supply.
First Condition: Place of Residence of the Recipient
The first condition of zero- rating will be satisfied if the recipient doesn’t have a place of residence in the UAE. A recipient of services may have a place of residence in the UAE if it has either of the following:
Conditions for a Transaction to be considered as Disbursement
- Place of Establishment: Place where the significant management decisions are taken, or central management functions are conducted.
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 acquire or supply goods or services including recipient branches.
Normally a business may have numerous establishments in different countries. A recipient also may have several different establishments, with some being in the UAE and some being outside the UAE. And it is necessary to determine which of these establishments should be considered as the recipient’s place of residence for public clarification.
Case Study 1 (zero-rated)
A recipient of services 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. If the services provided by the UAE supplier relate solely to the activities of the head office and do not involve the UAE branch, then the head office would be considered the establishment most closely related to the supply.
As a consequence, the place of residence of the recipient of services would be the country where the head office is located. So the recipient is eligible for zero-rated export of service.
Case Study 2 (standard-rated)
A UAE supplier makes a supply of services to the UAE branch of an overseas head office, and the services will be used solely for the branch; then, the branch would be the establishment most closely related to the supply.
As a result, the recipient would be treated as having a place of residence in the UAE, therefore preventing the supply from being zero-rated.
Other Cases
In some cases, the supply of services made by the supplier may be received, to some degree, by both the place of establishment and the fixed establishment. In such a case, the supplier will need to identify which establishment is most closely related to receiving the supply by considering the facts of each case objectively.
The following factors should be taken into consideration:
- Whether the services are related to the business being carried on by the recipient through an establishment in a particular country.
- Which establishment will receive the invoice and make payment for the supply?
- Which establishment is the contractual recipient of the supply?
- Which establishment is benefiting from the supply?
If a person does not have a place of establishment or a fixed establishment in any country, then the place of residence of the person is the state in which the usual place of residence of that person is located.
Second Condition: Location of the Recipient
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 or after the services are performed and consumed should not be taken into account for this condition. In other words, to determine whether this condition is satisfied, it is necessary to consider whether the recipient has any physical presence in the UAE at the time the services are performed.
It is important to note that a non-resident recipient of services (including a recipient which may already have a UAE establishment) may lose the ability to receive a zero-rated supply where they create a temporary presence in the UAE at the time the services are performed, which relates to the supply being made.
Explanation of the term ‘Outside the State’
Specifically, a person can still be considered as being outside the UAE where they only have a short-term presence in the UAE of less than a month and the presence is not effectively connected with the supply.
Case Study 1
An American resident natural person engages a UAE company for assistance with due diligence on a company he is interested in investing in. During the process, the person comes to the UAE on a week-long holiday and does not visit the UAE company or meet with its employees.
Case Study 2
An Indian-resident company employs a UAE law firm to represent it during ongoing litigation before the UAE courts. During the course of the litigation, one of the company’s employees comes to the UAE for a conference not related to the ongoing litigation.
Zero-Rated or Standard-Rated?
A Zero-rating is an exception to the default VAT rate, a supply should only be zero-rated if all the above conditions are satisfied. If the supplier is not able to establish the facts to support the zero-rating condition, the supplier must follow the standard rate.
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