UAE VAT: All about Zero-rating on Export Services

VAT Update: Public clarification on “Zero-rating of export of services” VATP019 issued by FTA
 

Zero-rating of export of services

The term "zero-rating on export services" refers that the services rendered or exported outside the UAE are subject to a ZERO VAT rate, which means that the supplier is not required to pay output tax on services exported and that registered entities can reclaim input tax on services provided. When you make zero-rate supplies, the goods are still VAT taxable, but the rate of VAT is zero. 

The term 'Outside of State'

Zero-rating the export of services is addressed under Article 31 of the Executive Regulation on Value Added Tax (VAT). Article 31(2), which specifies the word "outside of State," was revised by Cabinet Decision No. 46 of 2020 (released on June 4, 2020). If a person is only present in the state for less than a month and their presence is not effectively tied to the supply, they are termed "outside the state."

The Two Essential Conditions

FTA further clarifies that the export of services will be zero-rated if the following two conditions are met: 

1. The recipient of services should not have a place of residence in an Implementing State; and
2. The recipient of services should be outside the UAE when the services are performed

Let's take a closer look at these two conditions:

Recipients of services should not have a place of residence in an implementing state: The FTA has reiterated that the UAE does not recognize any other country as an Implementing State at this time and that the conditions will be met if the service beneficiary does not have a domicile in the UAE

Recipients of services should be outside the UAE when the services are performed: A place of establishment or fixed establishment, as well as a branch office, might be considered a place of residence. Furthermore, particular data about the service provider and the service recipient must be determined in order to determine if the services are Standard-rated or Zero-rated.

Note: The requirement of being outside the State must also be met in order for the services to be Zero-rated. A person who was in the UAE for less than a month when the services were provided and whose presence in the UAE has nothing to with the supply of such services would be considered to be outside the State. 

An Example demonstrating Zero-rating of export of services

ABC Limited is a UK-based firm with a branch in the United Arab Emirates. ABC Limited had contracted with XYZ LLC, a UAE-based company, to supply certain services over a six-month period. The UAE branch is not involved in the services and is not a recipient of them. ABC Limited will not be considered a resident of the United Arab Emirates. During this time, the Finance Director of ABC Limited traveled to Dubai for a 5-day conference that had nothing to do with the services or the service provider. ABC Limited will be regarded an out-of-state company. Because both qualifications are met, XYZ LLC's services qualify as exports of services and will be zero-rated for VAT purposes.

Download the full document issued by the UAE Federal Tax Authority

What steps do businesses need 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.

Conducting an audit to determine that the services offered by a firm can be charged at zero percent and to evaluate that all of the conditions are met by the recipient will be the best course of action. This may require changes to existing processes and procedures.

Learn more about KPI's VAT Advisory services.