The UAE Federal Tax Authority (FTA) has published a new VAT Public Clarification on the zero-rating of export of services, clarifying the rules surrounding the zero-rating of exported services. For a “zero-rated service,” the government does not tax its retail sale but allows credits for the value-added tax (VAT) paid on inputs. This reduces the price of services.

Zero Rating of Export of Services

The public clarification, Zero-rating of export of services provides the views of the Federal Tax Authority (FTA) on the conditions for zero-rating of export of services. The clarification is discussing the zero-rating of Export of services as per Article 31(1)(a) of the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax.

In this clarification, the authority has explained in detail about the two conditions that are to be fulfilled in zero-rating the export of services. The Article 31(1) (a) of the ER specifies zero-rating of services exported to a recipient of services who does not have a place of residence in an implementing state and who is outside the state at the time the services are performed. The main concerns on zero-rating the services are given to non-resident is related to his residency and location when services are received. The amendment made in Article 31(2) on when a person shall be considered as ‘Outside the state’ is also explained in the clarification.

The export of services to a non-resident will be zero-rated only when the recipient does not have a place of residence in implementing state and the recipient of the services should be outside the UAE at the time the service is provided. These conditions can be understood in detail as below:

Place of residence of the recipient

The condition states that the recipient of the service should not have a place of residence in an implementing state. It must be noted that at present since the implementing state provisions are not applicable term should be read as in the state. So the first condition in order to zero rate the service if the recipient does not have a place of residence in UAE.

The following are the circumstances wherein the recipient of services has a place of residence in the UAE

A “place of establishment”, where the recipient has legally established, and all significant management decisions are made or
A “fixed establishment”, any fixed place of business where all the activities are undertaken regularly or permanently with sufficient human resource and technology so as to enable the recipient to supply and buy the goods or services including the recipient’s branches.
If in case the recipient has multiple establishments within the UAE and outside the UAE, it becomes necessary to determine which of the establishments to be considered as recipient’s place of residence for the purpose of article 31 of the ER. However, the place of residence of the recipient should be the country where the fixed establishment or place of establishment is closely connected to the supply of services made.

Example: If the recipient of the services has a head office outside the UAE but have a branch within UAE and the service provided by the supplier in UAE is directly related to the head office and not the branch in UAE, then the head office would be considered as a place of establishment and the place of the recipient of services would be the country in which the head office is located.

Contrary to this if the UAE supplier provides services to the UAE branch having head office in the overseas and the services will be provided to branch alone, then the UAE branch will be considered as a place of establishment as the reason the place of residence of the recipient will be in UAE, which will prevent the supply from treating it as zero-rated.

In certain cases, the supply of services might be partially received by both, the place of establishment and fixed establishment. In such a case, the following factors must be considered to identify which establishment is closely related to the supply.

• An establishment which is the contractual recipient of the supply
• The establishment that is benefiting from the supply
• An establishment that receives an invoice and makes payment
• An establishment that provides instructions to the supplier
• Whether the services are related to business carried on by the recipient through an establishment country.

Location of the recipient

The second condition for zero-rating the export of services to a non-resident is that the recipient of the service must be present outside the UAE when the service is performed. For determining if this condition is satisfied, it becomes necessary to know if there any physical presence in the UAE at the time of performance of the service.

In other words, the physical presence of the recipient must be taken into consideration when the service is performed or provided by the supplier. The location of the recipient prior to or after the performance of the service and consumption is not to be considered while determining the taxability.

If any service is performed continuously and consumed during the course of time, than any presence of the recipient at the time of commencing or completion of the service would result in the recipient to be treated within UAE at the time of performing the service. Where the recipient has multiple establishments, the supplier must take into consideration only that establishment of the recipient which is more closely connected to the supply that is made in order to determine the location if is in UAE or not.

Also, If a non-resident recipient of the services may not be eligible for zero-rating the service, including the recipient having an establishment in UAE if any temporary presence is created with UAE at the time of service being performed. But it is important to see whether the presence in the state is connected to the service provided.

For example: if the non -resident recipient of legal service sends any representative to UAE to present before the court, such supply would not be zero rates as per the law as the representative of the non- resident recipient is in UAE while the performing of the service and is connected to the service performed.

So we need to understand the exception in this case that the supply would still be eligible for zero rates if the recipient of the services is physically present for less than 30 days and his presence is not connected with the supply.

To conclude, to zero-rate the export of service to a non-resident, all the conditions (1 & 2) must be fulfilled. The supplier must collect all the information to know about the recipient’s place of residence and the location of the recipient. Based on that the supplier should identify if the non-resident recipient is outside the UAE to tax the transaction at zero-rated. The supplier should consider the standard rating of the transaction if the non-resident is not outside the UAE while performing the service.

How can GITPAC help?

• Support taxpayers in UAE to assess whether the conditions for VAT zero-rating of export of services have been met to ensure correct VAT treatment.

GITPAC Consultancy Services provides exclusive Tax Consultation services to businesses in the UAE. Our Tax Professionals are highly qualified and well versed with the UAE Tax Law with the practical implementation of VAT in UAE. We understand that every business is different from the other. Hence, each of our services is tailored as per your business needs.