All About Zero-rating on Export Services in UAE
What is meant by zero-rating on export services?
Zero rating on export services means that the services which are rendered or exported outside the UAE are charged VAT at ZERO rate i.e. the supplier doesn’t have to pay output tax on the export of services and the registered entities can reclaim the input tax on the services provided by them. If you make supplies at zero rate, this means that the goods are still VAT taxable but the rate of VAT is zero.
Things to be known regarding zero-rating on export services in UAE:
Every company must be aware of the conditions that should be mandatorily fulfilled in order to charge zero-rate on export of services. The answer to the question of when to apply zero-rating is provided in the Article 31 of the Executive Regulation on Value Added Tax.
The main elements and the required conditions that are included in the above said article is explained below:
- The recipient of the service must not have a place of residence in the state (UAE).
If the recipient has any of the following establishments in the UAE then it may be considered that he has a place of residence in the state:
a) Place of establishment:
It can be defined as the place where the business is established and significant management decisions or central management functions take place. It may include the head office of a company or where the directors sit.
b) Fixed establishment:
It is defined as a fixed place of business with sufficient human and technological resources to supply and acquire goods and services including the branches of the said company.
Hence, the recipient won’t be provided services at zero rate.
Under some circumstances the recipient may have multiple establishments, some of which may be in UAE and some outside, under such a situation it must be observed that which establishment is closely related to the service. For example if a company has its head office in Africa and a branch in the UAE, and your company is supplying the services to that head office and the branch. Now here arises confusion related to which one should be considered as the place of residence? So under this situation the law instructs to look at the establishment which is closely related to the supply made. And it depends on the supplier’s decision to decide which of the following is closely related, so he must analyze deeply to identify it.
- Another condition that must be fulfilled is that the recipient of the service must be outside the state (UAE) while the services are rendered. Even a temporary presence of the recipient won’t be meeting the condition required for zero rated exports. There are some sub conditions which is required to consider a person outside the state:
a) The recipient must not be present in the UAE more than 30 days
b) If the recipient is in the UAE then his presence must not be connected with the service to be rendered.
- The services supplied must not be directly connected with the real estate in UAE or any improvements and movable personal assets in UAE.
The above mentioned conditions and elements must be kept in mind before treating an export of service as zero rated exports.
Some additional clarification related to zero rate on export services in UAE:
- The supplier of the service may face some confusion regarding the application of zero rate on the export services where a recipient may have multiple establishments, to avoid such confusion a test must be conducted to identify which establishment is closely related to the service:
a) Which establishment is titled as contractual recipient of the supply?
b) Which establishment will be benefiting from the supply?
c) Which establishment is to receive the invoice and will make payment for the service?
d) Which establishment issues instructions to the supplier?
- The location of the recipient before and after rendering of service must not be taken into account for the purpose of verifying the recipient's residence.
- The authority clearly states that if any of the criteria are not fulfilled then the supplier must charge the standard rate of VAT on the services.
- All the required documents and facts must be analyzed by the supplier to ensure that the recipient is eligible for zero rate export service.
Let us consider a situation where there is ABC co. a UAE based company which provides tax advice to its clients, and one another company named PQR, the head office of which is situated outside the UAE say in the UK and this company has a branch in UAE let us name it PQR co. branch. Now ABC co. supplies services to the PQR co. in the UK i.e. head office. Here the head office enters into contract with the supplier and the invoice of the service rendered is also directly sent to the head office, also the representative of the head office directly deals with the UAE supplier. Hence, the service rendered is zero rated exports because it is not connected to the branch of PQR co. whereas, if the dealings were done with the branch company then the supplier will have to charge the standard rate of VAT.
How can CDA help?
It will be a best course of action to conduct an audit to ensure that the services provided by a firm can be charged at zero rate and to verify whether all the conditions are fulfilled by the recipient. CDA provides the best team for conducting such audits. The well qualified and efficient professionals of our team are always ready to tackle the challenges of the client; also their effort is always focused to safeguard the clients from future shocks and threats related to any aspect. Our main objective is to identify the bottleneck areas of the clients and take the required measure to improve it.