UAE publishes VAT Public Clarification on zero-rating of export of services

This Indirect Tax alert covers the recent Value Added Tax (VAT) developments in the United Arab Emirates (UAE).


The UAE Federal Tax Authority (FTA) has published a new VAT Public Clarification on the zero-rating of export of services.

This follows the publication of an updated version of the Executive Regulations to the Federal Decree Law No. 8 of 2017 on VAT (“the Regulations”) earlier this month. Please refer to our most recent client alert for more information.

VATP019 provides an overview of the FTA’s view of the zero-rating conditions in Article 31 of the Regulations. A supply of services may only be zero-rated if (1) the recipient does not have a place of residence in an Implementing State and (2) is outside the UAE at the time the services are performed.

The Public Clarification provides further clarity on how the FTA interprets ‘outside the State’ in the context of the recent change in the Regulations. Further details are also provided regarding taxpayers’ obligations to determine the facts and circumstances of a transaction before applying the zero rate.

Place of residence

A recipient of services is regarded as having a place of residence in the UAE if the recipient has either a place of establishment (where it is legally established) or fixed establishment (any fixed place where business is regularly conducted with sufficient human and technology resources).

Where a recipient has establishments in multiple jurisdictions, the establishment most closely related to the supply of services must be determined. UAE suppliers are only entitled to apply the zero rate of VAT on services supplied, if the establishment of its recipient, that is most closely connected to the supply, is outside UAE.

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.

Location of recipient

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 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 of services cannot be ascertained, the supplier must standard rate the supply.

Action to take

With the release of this Public Clarification, the FTA will expect businesses to carefully consider whether or not the criteria for zero-rating the export of services are satisfied and ensure that appropriate supporting evidence is available. For businesses with high volumes of overseas transactions, this may present a challenge.  Some key questions that UAE businesses should consider include:

  • Do we currently know if our overseas customers have any kind of presence in the UAE, and is that presence greater than one month?
  • If our overseas customer has a presence in the UAE, could their local presence be connected in any way with the supplies we make?
  • Do our on-boarding processes identify whether our customers have a UAE presence?
  • Do our contracts contemplate a situation where VAT could become chargeable now or in the future? Would we be allowed to charge VAT on top of the value of our services and would the customer be obliged to pay it?

Businesses that supply services to overseas customers should carefully review their arrangements to ensure that the correct VAT treatment is applied. To this end, businesses should explore expanding customer identification procedures and amending contracts as necessary. 

We recommend that businesses establish an audit trail where possible in order to establish that steps are taken to ensure that the zero rate is correctly applied to supplies of services.  This may require changes to existing processes and procedures.

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