UAE Federal Tax Authority (FTA) has recently published a public clarification on “Zero-rating of export of services” (VAT Public clarification – VATP019). 

The clarification provides an overview of FTA’s position on the zero-rating conditions as per Article 31 of UAE VAT Executive regulations (“VAT ER”).

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Below are the key highlights of the FTA Public Clarification:

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Article 31 (1)(a)(1) of VAT ER

A supply would only be zero-rated if the following two conditions are met:

• ●
• Recipient of services does not have a place of residence in an Implementing state; and

• ●
• Recipient is outside the UAE at the time the services are performed.

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Place of residence

Currently, UAE does not recognize any other state as “Implementing state” so the first condition of recipient not having place of residence in an implementing state, will be met if recipient does not have place of residence in UAE

Place of residence will be considered in UAE if recipient has either of following in UAE:

• ●
• Place of establishment – the place where the recipient if legally established, in which significant management decisions are taken or central management functions are conducted

• ●
• Fixed establishment – the place where the recipient conducts business regularly and where sufficient human and technology resources exist, including recipient’s branches

If recipient has establishments in multiple jurisdictions, then the establishment most closely related to the supply of services must be determined.  And, zero-rate can be applied if the establishment of recipient which is most closely connected to the supply, is located outside UAE.

If there is uncertainty as to whether the supply of services has been received by the UAE or outside UAE establishment of the recipient, following factors should be considered to determine the establishment most closely related to the supply:

• ●
• Which establishment is the contractual recipient of supply;

• ●
• Which establishment is actually benefitting from the supply;

• ●
• Which establishment will receive the invoice and make payment for the supply;

• ●
• Which establishment provides instructions to the supplier;

• ●
• Whether the services are related to business being carried on by recipient through an establishment in particular country

In case of a natural person, the place of residence is the state in which the usual residence of that person is located.

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Location of the recipient

The physical presence of the recipient during the period in which the supplier performs the services and the recipient consumes them should be taken into account.

Below factors should be considered for determining the location of the recipient:

• ●
• Where the services are continuous in nature, then any presence of the recipient during commencement, throughout or during completion of service in UAE would result as recipient being treated as being within UAE at the time services are performed;

• ●
• Where the services are of a nature that they are performed and consumed at the time that they are completed, then the location of the recipient at the time of completion of the services will determine whether the recipient is outside or inside the UAE at the time the services are performed.

• ●
• Where the recipient has establishments both inside and outside the UAE and the supply is most closely connected with the non-resident establishment of the recipient, then that non-resident establishment of the recipient will be treated as the location of the recipient.  However, the non-residence recipient of services may lose the ability to receive zero-rated supply if it creates even a temporary presence (i.e. one month or more) in the UAE at the time the services are performed.

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Extension to the term “outside the state”

Article 31(2) of VAT ER provides an exception to the condition that the recipient of the services must be physically outside the UAE for zero-rating to apply.  

Basically, a person can still be considered as being outside 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.

For example, a Canadian 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 weeklong holiday and does not visit the UAE Company or meet with its employees.  So, in this example, the person’s presence is both short term and is not effectively connected with the supply, therefore recipient would still be considered outside UAE.

In this public clarification, FTA has stated that if the supplier is not able to establish the necessary facts to ascertain if all the zero-rating conditions are met, then the supplier must standard rate the supply.

So, it’s extremely important for businesses dealing with overseas customers that they review their customer on-boarding procedures and other arrangements to ensure that the identification of recipient’s residency status and location is taken into account for the application of correct VAT treatment.

If you would like to discuss any VAT matters, please drop us an email at info@premier-brains.com or call us at +971 4 3542959.