With VAT still being a fairly new concept in the UAE, the following article delves into the general principles contained within the VAT Laws and goes into detail on what the law says about the Export of Services from the UAE.
The general principles contained in the VAT Laws state that the Export of Services shall be zero-rated in the following cases:
- If the following conditions are met:
- The services are supplied to a recipient of services who does not have a place of residence in the UAE and who is outside of the UAE at the time the services are performed.
- The services are not supplied directly in connection with real estate situated in the UAE, any improvement to the real estate or directly in connection with moveable personal assets situated in the UAE at the time the services are performed.
- If the services are performed outside the UAE or are the arranging of services that are actually performed outside the UAE; and
- If the supply consists of the facilitation of outbound tour packages, for that part of the service, which may include services provided in packaging one or more tourism products and also services outside the UAE, including but not limited to, such goods and services as accommodation, meals and transport.
The VAT Laws go on to list an exception to the above general rule in that a supply of services shall not be zero-rated, if the supply is made under an agreement that is entered into, whether directly or indirectly, with a recipient of services who is a non-resident, if all of the following conditions are met:
- The performance of the services is, or it is reasonably foreseeable that the performance of the services will be, received in the UAE by another person, including but not limited to, an employee or a director of the non-resident recipient of services; or
- It is reasonably foreseeable, at the time the agreement is entered into, that another person in the UAE will receive the services in the course of making supplies for which Input Tax is not recoverable in full.
The FTA issued a clarification regarding the above provisions and therein stated that in determining if the above conditions are met, the supplier must consider all the available facts in order to identify the residency status and the location of the recipient of the services and where recipients have multiple establishments, the supplier must also determine which establishment of the recipient of the services is most closely related to the supply.
In compliance with the above conditions, and in qualification thereof, the first thing to be determined to qualify for a zero-rating of services is that the recipient of the services does NOT have a place of establishment in the UAE, in other words, that for the recipient of the services:
- their business is not legally established in the UAE pursuant to the corporate incorporation documents;
- that significant management decisions regarding their business are not taken in the UAE;
- that central management functions are not conducted in the UAE; and
- that the recipient of the services does not have any fixed place of business in the UAE where the recipient conducts his business regularly or permanently and where sufficient human and technology resources exist to enable the recipient to supply or acquire goods or services, including any branches.
Often a business may have a number of entities in different countries including inside the UAE and in this event, it is necessary to determine which of these entities should be considered to be the services recipient’s place of residence for purposes of the VAT Law and this is done by determining the location of which of the recipient’s entities is most closely related to the supply. If the entity that is most closely related to the supply is located in the UAE, then the supply cannot be zero-rated. This is an important factor when dealing with entities that have branches in the UAE where it may be difficult to establish if the services are supplied to the local branch or not. The basic mechanism would be to consider the following (amongst other questions):
- which recipient is the contractual recipient of the supply;
- which entity is actually benefitting from the supply;
- which entity will receive the invoice and which will make payment for the supply;
- which entity has provided instructions to the supplier; and
- whether the services are related to the business being carried on by the recipient through an entity in a particular country.
To qualify for the zero-rating of a service, the recipient of the service must also be outside the UAE at the time the services are performed. To establish whether the recipient of a service has any physical presence in the UAE at the time the services are performed, both the nature of the service supplied and the period or duration during which the services are performed by the supplier and are consumed by the recipient needs analysis. In other words, the physical presence of the recipient of the services only needs to be determined during the period or periods in which the supplier supplies and the recipient consumes them needs consideration. Physical presence will be established if the services are continually performed and consumed for a duration of time and the recipient is present during commencement, throughout, or during completion of the service. If 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 will determine if the supply is zero-rated or not. In the case of multiple entities, the location of the entity most closely related to the supply must also be considered in determining whether the recipient is inside or outside the UAE.
As an example of the above, it can be noted that if a law firm provides legal services to a non-resident client, and the client sends a representative to the UAE to be present during a court case or hearing, even consultation, the law firm would not be able to zero-rate the supply of the legal services supplied to the non-resident client while the representative was present in the UAE as a result of the representatives’ physical presence during the performance of the supply.
There is in the VAT Laws a special condition relating to a person being “outside the UAE” and refers to whereby provision is made that a recipient of a service can still be considered to be “outside the UAE” if the recipient only has a short-term presence in the UAE of less than a month, and the only presence in the UAE is not effectively connected with the supply.
An example of the above where a presence is unconnected with the supply would be where a law firm represents a non-resident client in a court case in the UAE, and a representative of the client attends a meeting in the UAE unrelated to the court case during the same time as law firm performs its services to the client in relation to the court case in the UAE. It is important to note that if the client is a non-resident, however, engages with a law firm in the UAE during a visit to the UAE, the supply cannot be zero-rated, irrespective of whether or not the person is an individual or representative of a corporate entity and a representative of the entity attends at the time of the delivery of the services in the UAE.
It is the onus of the supplier to establish whether VAT can be applied at a zero-rate or if the standard rate will apply, and due diligence must be exercised and in the event that it is not clear then the standard rate must be applied to the supply.
Authored by John Peacock, Senior Associate