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If you are a UAE taxpayer supplying goods / services globally, or a CFO of such a taxpayer, it is vital to stay informed about the zero-rating of certain exported services under the VAT regime.
This article aims to break down the FTA's public clarification on this topic in simple language, providing a clear understanding of the conditions and requirements necessary for taxpayers to apply zero-rating to exported services.
Understanding Zero-Rating Conditions
To apply zero-rating to exported services, taxpayers must meet two primary conditions concerning the recipient’s place of residence and the recipient’s location during the service performance. The recipient of the services must not have a place of residence in an Implementing State, and they must be outside the UAE at the time the services are performed.
As per the UAE Corporate Law, GCC countries may be regarded as an Implementing State based on reciprocal arrangement under the laws of each country. However, currently, the UAE does not recognise any other state as an “Implementing State” for the purposes of VAT. Consequently, the first condition for zero-rating will be satisfied if the recipient does not have a place of residence in the UAE.
Determining Residency
A recipient's place of residence can be either a place of establishment or a fixed establishment. A place of establishment is a place where the recipient is legally established, where significant management decisions are taken or central management functions are conducted. A fixed establishment is considered as 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.
If the recipient has multiple establishments, the supplier must determine which establishment is most closely related to the supply. For instance, if a UK-based company with a branch in the UAE receives consultancy services, the zero-rating can be applied if the UK establishment is most closely related to the services provided.
Recipient’s Location
The recipient must be outside the UAE when the services are rendered. Temporary presence in the UAE, such as a short visit of less than a month that is not connected to the supply of services, does not affect the eligibility for zero-rating. For example, if a natural person from Germany receives IT support services from a UAE taxpayer, while he is temporarily in the UAE for a holiday, the service can still be zero-rated if it is not connected to their visit.
Practical Implications
A supply should only be zero-rated where the supplier can ascertain that all of the above conditions for the application of the 0% rate are satisfied. Therefore, companies must carefully assess all relevant facts to determine the residency and location of their service recipients and call for additional information if required. If the supplier is not able to establish the necessary facts to ascertain if the zero-rating conditions are met, the supplier must apply the standard VAT rate rather than the zero VAT rate.
It is essential to maintain thorough documentation and evidence supporting the recipient's status and their location at the time of service performance to ensure compliance with the zero-rating rules.
Conclusion
The FTA's public clarification on the zero-rating of exported services is a crucial guide for UAE taxpayers. Determining recipient’s residency and the location can be particularly challenging in case of digital or e-commerce supplies.
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
