The FTA has published its new Public Clarification regarding zero-rating of export of services in which it explains 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").
Namely, there are two main conditions which must be met as per Article 31(1)(a)(1) Executive Regulations:
- Condition 1: the recipient of the services should not have a place of residence in an Implementing State (i.e. currently, the UAE does not recognize any other state as an "Implementing State" for the purposes of VAT, consequently, the term "Implementing State" should be read as the "UAE")
- Condition 2: the recipient of the services should be outside the UAE at the time the services are performed by the supplier.
The Public Clarification provides with the further explanation on these conditions.
Condition 1. The recipient of services should not have a place of residence in an Implementing State.
A recipient of services may have a "place of residence" in the UAE if it has either of the following in the UAE:
- A "place of establishment" - the place where the recipient is legally established pursuant to the decision of its establishment, in which significant management decisions are taken or central management functions are conducted, or
- A "fixed establishment" - any fixed place of business in which the recipient conducts business regularly or permanently and where sufficient human and technology resources exist to enable the recipient to supply or acquire goods or services, including the recipient’s branches.
Where a recipient has a number of establishments in different countries, the place of residence of that recipient should be considered to be the country in which the recipient’s place of establishment or fixed establishment most closely related to the supply of services being made is located. In order to identify the most closely related establishment the following factors should be taken into consideration:
- which establishment is the contractual recipient of the supply;
- which establishment is actually 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.
Where a person does not have a place of establishment or a fixed establishment in any country (e.g. in case of an individual), then the place of residence of the person is in the state in which the usual place of residence of that person is located.
Examples:
1. A recipient of services may have a head office (i.e. a place of establishment) outside the UAE and a branch (i.e. a fixed establishment) in the UAE. If the services provided by the UAE supplier relate solely to the activities of the head office and do not involve the UAE branch, then the head office would be considered the establishment most closely related to the supply.
2. In contrast, where, for example, a UAE supplier makes a supply of services to the UAE branch of an overseas head office and the services will be used solely for the purposes of the branch, then the branch would be the establishment most closely related to the supply. As a result, the recipient would be treated as having the place of residence in the UAE, therefore preventing 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.
In order to determine whether this condition is satisfied, it is necessary to consider whether the recipient has any physical presence in the UAE at the time the services are actually performed. This requires consideration of the nature of the services supplied and 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 or periods in which the supplier performs services and the recipient consumes them needs to be taken into account:
- In case of continuously performed service which is performed and consumed for a duration of time, then any presence of the recipient during commencement, throughout, or during the completion of the service in the UAE would result in the recipient being treated as being within the UAE "at the time the services are performed".
- 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 of the services will determine whether the recipient is outside or inside the UAE at the time the services are performed.
- the location of the recipient before or after the services are performed and consumed should not be taken into account for the purposes of this condition.
It should be noted that where the recipient has multiple establishments, the supplier should only take into account the establishment of the recipient which is most closely related to the supply being made in determining whether the recipient is outside or inside the UAE at the time the services are performed.
Also, a non-resident recipient of services (including a recipient which may already have a UAE establishment) may lose the ability to receive a zero-rated supply where they create a temporary presence in the UAE at the time the services are performed, which relates to the supply being made.
The above principles relate to companies and other entities, which are capable of being established and present in multiple locations simultaneously, and do not apply to natural persons who are incapable of having a simultaneous presence in multiple locations. Therefore, where an individual is physically inside the UAE, he or she cannot be "outside the State". This presence of the individual in the UAE at the time the services are performed would typically take away the ability of the supplier to zero-rate the supply to the individual.
Extension to the term "outside the State"
The ability to zero-rate a supply is not unduly affected where the recipient has a UAE presence which is both short-term (i.e. less than a month) and is not effectively connected with the supply, and, as a consequence, this presence is unlikely to be known to the supplier of the zero-rated services.
In order to ensure that the zero-rated treatment is not applied incorrectly, 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 the location at the time the services are performed. 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.
Examples:
1. 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.
2. A UK-resident company employs a UAE law firm to represent it during an 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.
3. 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.
4. 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 should not be supplied directly in connection with real estate situated in the UAE or 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.
- 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.
