This Public Clarification provides a high-level clarification of the FTA’s view of the zero-rating conditions in Article 31(1)(a) of the Executive Regulation relating to the residency and location of the recipient of services, taking into account the amendments made to Article 31(2) of the Executive Regulation in Cabinet Decision No. 46 of 2020. In accordance with Article 31(1)(a)(1) of the Executive Regulation, a supply may only be zero-rated where the recipient of services does not have a place of residence in an Implementing State and is outside the UAE at the time the services are performed. In determining whether these conditions are met, the supplier must consider all available facts in order to identify the residency status and the location of the recipient. Where the recipient has multiple establishments, the supplier must also determine which establishment of the recipient is most closely related to the supply. Detailed discussion Article 31(1)(a) of the Executive Regulation allows the zero-rating of the export of services, subject to certain conditions. These conditions include the following condition in subsection (1) of Article 31(1)(a) of the Executive Regulation:

1. The Services are supplied to a Recipient of Services who does not have a Place of Residence in an Implementing State and who is outside the State at the time the Services are performed;

Subsection (1) of Article 31(1)(a) contains two requirements which must be met in order for a supply to be able to be zero-rated – firstly, the recipient of the services should not have a place of residence in an Implementing State, and secondly, the recipient of the services should be outside the UAE at the time the services are performed by the supplier. This Public Clarification provides the FTA’s views regarding the interpretation of these two conditions. Condition 1: Place of residence of the recipient The first condition for zero-rating is that the recipient of services should not have a place of residence in an Implementing State. Article 1 of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (the “Decree-Law”) defines “Implementing States” as “GCC States that are implementing a Tax law pursuant to an issued legislation”. Article 70(15) of the Executive Regulation states that a GCC State shall be treated as an Implementing State if the GCC State treats the UAE similarly as an Implementing State in its published legislation, and is in full compliance with the provisions of the Common VAT Agreement of the States of the Gulf Cooperation Council (GCC). It should be noted that currently, the UAE does not recognise any other state as an “Implementing State” for the purposes of VAT. Consequently, the first condition for zero-rating (i.e. that the recipient of services should not have a place of residence in an Implementing State) will be satisfied if the recipient does not have a place of residence in the UAE. 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”, being 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”, being 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.

Often, a business may have a number of different establishments in different countries. Where a recipient has a number of different establishments, with some being in the UAE and some being outside the UAE, it is necessary to determine which of these establishments should be considered as the recipient’s place of residence for the purposes of Article 31 of the Executive Regulation. 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 (Article 32 of the Decree Law). For example, 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. As a consequence, the place of residence of the recipient of services would be the country where the head office is located. 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. In some cases, the supply of services made by the supplier may be received, to some degree, by both the place of establishment and the fixed establishment. In such a case, the supplier will need to identify which establishment is most closely related to receiving the supply by considering the facts of each case objectively. 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 business being carried on by the recipient through an establishment in a particular country.

It should be noted that where a person does not have a place of establishment or a fixed establishment in any country (for example, a natural person), then the place of residence of the person is the state in which the usual place of residence of that person is located (Article 32(3) of the Decree-Law). Condition 2: Location of the recipient The second condition for zero-rating is that the services are supplied to the recipient who is outside the UAE at the time the services are performed. In other words, 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 performed. The requirement that the location of the recipient should be determined “at the time when the services are performed” 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; 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. For example, where services are such that they are continuously performed and consumed for a duration of time, then any presence of the recipient during commencement, throughout, or during 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”. Similarly, 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. 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. Therefore, where the recipient has establishments both inside and outside the UAE and the supply is most closely connected with the non-resident establishment of the recipient, then that non-resident establishment of the recipient will be treated as the location of the recipient for the purposes of Article 31(1)(a) of the Executive Regulation. In such circumstances, the condition that the recipient is outside the UAE would be met even if the recipient also has a UAE establishment. It is important to note that a non-resident recipient of services (including a recipient which may already have a UAE establishment) may lose the ability to