Zero-rating of export of services- UAE VAT updates

Zero-rating of export of services- UAE publishes VAT Public Clarification This Indirect Tax alert covers the recent Value Added Tax (VAT) developments in the United Arab Emirates (UAE).

Zero-rating of export of services : Article 31 of the Executive Regulation on Value Added Tax (VAT) deals with Zero-rating the Export of Services. Cabinet Decision No. 46 of 2020 (issued on 4 June 2020) amended Article 31(2) which defines the term “outside of State”. A Person shall be 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.

Zero-rating of export of services
Zero-rating of export of services

The Public Clarification sets out criteria to consider in determining the establishment most closely related to the supply where there is uncertainty regarding whether a supply of services is received by a foreign or UAE establishments of a recipient. These include 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 business being carried on by the recipient through an establishment in a particular country.

Following the recent change in the Regulations (Article 31(2)), it is now clear that the zero rating will not apply when the recipient of a supply is physically located in UAE for one month or more, and that presence is effectively connected to the supply being made.

The Public Clarification on Zero-rating of export of services states that only the physical presence of the recipient during the period of supply and consumption needs to be taken into account; the location of the recipient before and after performance and consumption of the services should not be taken into account.

Importantly, VATP019 states 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 non-UAE establishments, and the non-UAE establishment is most closely related to the supply, the condition that the recipient is outside the UAE may still be met, despite the recipient having a UAE establishment.

However, a non-UAE recipient of services (including one which already has a UAE establishment) may no longer be considered ‘outside the UAE’ if it creates even a temporary presence (i.e. one month or more) in the UAE at the time the services are performed, which relates to the supply being made.

In addition, VATP019 provides examples related to the amended Article 31(2) of the Regulations, whereby a person can be considered outside the UAE only where they have only a short-term presence in the UAE of less than a month and the presence is not effectively connected with the supply.

The FTA expressly states that where all conditions for the zero-rating of the export services cannot be ascertained, the supplier must standard rate the supply.


Related Links:
VAT Audit Dubai UAE, Chartered Accountants DMCC Dubai

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