Zero-rating of export of services (Public Clarification VATP019)
The FTA (Federal Tax Authority) has released its new Public Clarification regarding zero-rating of export of services in which it states that the application of the conditions prescribed in Article 31(1)(a)(1) of Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments (“Executive Regulation”). It means that the export of services to international countries which don’t come under the GCC territory will be considered as zero-rated under VAT in UAE only if the 2 conditions are met.
The two conditions that are mandatory and that are needed to be met according to Article 31(1)(a)(1) Executive Regulations is:
- The recipient of the services should not have a place of residence in an Implementing State.
In simple words, it means that as of now, UAE doesn’t consider any other state as an “Implementing state” for any purpose of VAT and therefore the phrase “ Implementing state should be only interpreted as UAE
- The recipient of the services should be outside the UAE at the time the services are performed by the supplier.
Which means the recipient shouldn’t be present in UAE physically.
Public Clarification further explains these conditions in detail.
Condition 1. The recipient of services should not have a place of residence in an Implementing State.
So according to the condition, it says that the recipient of the services cannot have a place of residence in the Implementing state i.e. UAE but there’s an exception where they are allowed to have a place of residence if it has either of the factors being met in the UAE:
- Place of establishment: the place where the recipient is lawfully/legally settled according to the choice of its foundation, and where the majority of its decisions are taken, or the core management functions take place
- Fixed establishment: any permanent place of trade in which the beneficiary conducts trade frequently (day to day) or permanent and where the majority of his human and technology resources to empower the recipient to supply or secure merchandise and even the recipient’s branches.
It might be tough to figure out the place of residence of the recipient if he has several establishments in different countries but in that case, the place of residence of the recipient would be considered to be the one where it was established or its fixed establishments which are most closely related to the supply services that are being produced is located. In order to figure out what factors help us to figure out the most closely related to the supply services that are being produced is located the following factors have to be kept in mind:
- which establishment is the contractual recipient of the supply;
- which establishment is 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 the business being carried on by the recipient through an establishment in a particular country.
In some cases, it is possible that an individual might not have a place of establishment in any country, so in that case, the place of residence of that individual would be the state in the place where his usual place of residence is.
- So, for instance, the receiver of the services might have a head office outside the Implementing state (UAE) and a branch in UAE. So if there’s a supplier from UAE whose supplying his services and has nothing to do with UAE branch but its focus and dealings is with the head office then the establishment most closely related to supply would be the head office (a place of establishment)
- In comparison to the above example if the UAE supplier supplies and solely deals with the UAE branch then, then the branch would be the establishment most closely related to the supply. So in that case recipient would be considered having a place of residence within the UAE and would prevent the supply from being zero-rated.
Condition 2. The recipient of the services should be outside the UAE at the time the services are performed.
To decide if this condition is fulfilled, it is important to consider whether the beneficiary has any physical nearness in the UAE at the time the services are being performed. Just the physical presence of the recipient during the period or periods in which the provider performs his services and the beneficiary consumes them should be considered.
But on the other hand if we ongoing service is being taken place and consumed for a considerable duration then any physical presence of the recipient while the completion of the services in the UAE would be considered as recipient being within the UAE.
The location of the recipient at the time of completion of the services will define whether the recipient is within the UAE or not at the services being performed and this applicable if the nature of the service is that if the services have been taken place at that particular time and have been consumed.
In many cases, it’s possible that an individual might have many establishments, but the supplier should only consider the establishment of the recipient which is closely related to the supply being made in making a decision whether the recipient is within UAE or not.
On the other hand, a nonresident whose recipient of services might lose his advantage over zero-rated supply when they create a temporary presence within the implementing state.
In the above conditions as discussed these are only applicable to companies, who have the capability of being established and present in different locations at the same time. But these don’t apply to individuals who aren’t capable of being in different locations at the same time. If the individual is physically present within the UAE at the services that are being taken place, then this would strip away the power of the supplier to provide with zero rate supply to the particular individual. So, when an individual is physically present and is residing within the UAE, then, in that case, the individual cannot be classified as being “outside the state”
Further on to make sure that the zero-rated treatment is not being applied inaccurately the supplier should do a detailed study/research on the recipient’s residency status and location and can even ask the recipient to provide the supplier with this information. In case the recipient is not able to provide the supplier with these details then the supply has the right to charge the recipient on the standard rate and revoke the recipient from the zero ratings.
- Where a non-resident recipient of legal services relating to some arbitration sends its representative to the UAE to be present during the hearing, the law firm making the supply would not be able to zero-rate the supply of the services relating to the arbitration process during which the client was present in the UAE — since the non-resident client, through its representative, was physically present in the UAE at the time the services were performed by the law firm.
- A UK-resident company employs a UAE law firm to represent it during ongoing litigation before the UAE courts. During the course of the litigation, one of the company’s employees comes to the UAE for a conference not related to the ongoing litigation.
- A UAE investment fund provides fund management services to a US-based company. The company has a UAE branch which is not related to the supply being made by the investment fund. The US establishment sends a staff member to the UAE for 3 weeks to provide training to the employees of the UAE branch.
- 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 week-long holiday and does not visit the UAE company or meet with its employees.
For completeness please note that Article 31 of the Executive Regulation also sets other conditions which need to be fulfilled for the supply of services to qualify for zero-rate:
- The services shouldn’t be straightway supplied in connection with real estate which is within UAE or any improvement to the real estate or straightforwardly regarding moveable individual resources arranged in the UAE at the time the administrations are performed.
- The performance of the services should not be received in the UAE by another party who may be receiving the services in the course of making supplies for which input VAT is not recoverable in full.
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