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5 August 2020
Zero-rating of export of services
 
The FTA (Federal Tax Authority) has recently issued a Public Clarification under UAE VAT law explaining the taxability of export of services. We have summarized below the gist of the key UAE VAT positions discussed in this clarification below:
 
As per Article 31(1)(a)(1) of the executive regulation, a supply may be zero-rated wherein two conditions are satisfied –
  1. Service is supplied to a person who does not have a place of residence in an Implementing state;
  2. Recipient of service should be outside UAE at the time service is performed;
The above conditions have been explained in detail in the Public clarification.
 
Condition 1 - Service is supplied to a person who does not have a place of residence in an Implementing state.

I. A recipient of service may have “place of residence” in UAE if it has either of the below in UAE –
  • The place where the recipient is legally established according to the decision of its establishment, in which significant management decisions are taken, or central management functions are conducted; or
  • Any fixed place of business where the business is conducted regularly or permanently with the support of human and technological resources for supplying and acquiring goods or services, including the recipient’s branches.
In case a recipient has establishments outside and within UAE, the place of supply would be determined basis the location which is most closely related to the supply.
 
Here are a few examples:

 
Head Office (HO) of the recipient of service Brach Office of the recipient of service Service availed by Place of Residence 
Outside UAE Within UAE Solely by HO Place of residence outside UAE
Outside UAE Within UAE Solely by Branch Place of residence within UAE
Outside UAE​ Within UAE To some extent by HO and Branch office In such instance, the following points need  to be analyzed
  1. To which establishment does  the contractual recipient of the supply belong;
  2. Who is benefitting from the supply;
  3. Who will receive the invoice and who will make the payment;
  4. Which establishment provides instructions to the supplier; and
  5. Whether the services are related to business carried out by the recipient through an establishment in a particular country.
Based on the above, the entity which would be considered as a recipient for which place of supply will be determined. Further, in the case of a natural person, the place of residence would be the state in which the usual place of residence of the person is located.
 

II. As per Article 1 of the Federal decree-law, “Implementing State” is defined as “GCC States that are implementing a Tax law pursuant to an issued legislation.”
  • Article 70 (15) of the Executive Regulation states that GCC state shall be treated as an implementing state if –
    1. The GCC state treats UAE as an implementing state; and
    2. Provisions of the Common VAT Agreement of the States of the GCC has been fully complied;
  • It has been clarified that UAE does not recognize any other state as an “Implementing State” for the purpose of VAT;
Consequently, the first condition may be fulfilled if the recipient does not have a place of residence in the UAE.
 
Condition 2 - Recipient of service should be outside UAE at the time service is performed
  • In order to determine whether this condition is met, one must consider the recipient’s  physical presence in the UAE while the service is performed;
    Following are the requirement for the recipient’s location tobe determined “at the time when services are performed
    1. The nature of the services supplied;
    2. The period or duration during which the services are performed by the supplier and consumed by the recipient;
  • Only the physical presence of the recipient during the period for which the supplier delivers the service and the recipient avails the service needs to be taken into account;
  • The location of the recipient before and after the service is performed should not be taken into account for this condition;
  • If services are continuously performed for a certain duration then the recipient’s presence during commencement, throughout; or at time of completion; would be treated within the UAE at the time services were performed;
  • In case the nature of services which are performed and used at the time when they are completed, then the recipient’s location at the time of completion of service will determine whether the recipient is outside or inside UAE at the time service is performed;       
  • If the recipient having multiple establishments, then supplier should consider only that establishment which is most closely related to the supply being made for determining whether the recipient is outside or inside UAE;
  • A non-resident recipient of service in case they create a temporary presence in UAE at the time services are performed, then the service will not be considered as Zero rated;
For example:
 
Service provider (Law firm) Service receiver (outside UAE)  Arbitration service  Taxability 
In UAE  Representative in  UAE during the hearing Service provided in UAE  Would not be zero rated as representative is present in UAE 
 
  • The above principle applies to companies and other establishments which are capable of setting up multiple locations simultaneously and does not apply to anyone who cannot be present at multiple locations;
  • Therefore, where an individual is physically inside the UAE, he or she cannot be ‘outside the State;’
  • The presence of an individual in the UAE when the services are performed would typically take away the supplier’s ability to zero-rate the supply to the individual.
    Article 31(2) of the Executive Regulation provides a special extension to the meaning of the term ‘outside the State.’ As per the above, a person can still be considered as being outside the UAE where –
    1. they only have a short-term presence in the UAE of less than a month; and
    2. the presence is not effectively connected with the supply.
The purpose is to ensure that the ability to zero rate is not affected where a person has a presence in UAE, which short term and not connected to the supply and the same is unlikely to be known to the supplier. The examples have been tabulated ahead –
 
Service provider   Service receiver  (outside UAE)  Short term visit - scenario Taxability 
In UAE (law firm) – hired for litigation in UAE  Company in the UK  Company executive travels to UAE for conference not related to litigation To be considered as outside state and hence zero-rated 
In UAE (Investment fund) US-based company - having  a branch in UAE – which is not related to the investing activity A staff member of US company travels to UAE for training employees of the UAE branch To be considered as outside state and hence zero-rated 
In UAE (due diligence company)- hired for due diligence on a company the receiver is interested in investing Canadian resident – natural person Canadian resident – comes to UAE on vacation and does not visit the UAE company To be considered as outside state and hence zero-rated 

 
Our Comments
  1. Since zero ratings is an exception to the default rule, and hence should be done if all of the above conditions of 0% is met;
  2. In order to ensure that the zero rated treatment is right, the supplier should consider all available facts and seek, if necessary, additional information from the recipient in order to identify the recipient’s residency status and location at the time when services are performed;
  3. If the supplier is not able to establish the necessary facts to ascertain if the zero rating conditions are met, the supplier must standard rate the supply.
Source: VAT Public Clarification - Zero-rating of export of services


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