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.
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:
- 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 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. For example, 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.
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.
It should be noted that Article 31(2) of the Executive Regulation provides a special extension to the meaning of the term “outside the State”. This is discussed below.
Extension to the term “outside the State”
Article 31(2) of the Executive Regulation provides an exception to the condition that the recipient of the services must be physically outside the UAE for zero-rating to apply. Specifically, a person can still be considered as being outside the UAE where they only have a short-term presence in the UAE of less than a month and the presence is not effectively connected with the supply.
The purpose of this condition is to ensure that the ability to zero-rate a supply is not unduly affected where the recipient has a UAE presence which is both short-term 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. For example, a recipient would still be considered to be outside the UAE in situations involving the following scenarios:
- 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.
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.
- 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.
Since zero-rating is an exception to the default VAT rate, a supply should only be zero-rated where the supplier can ascertain that all of the above conditions for the application of the 0% rate are satisfied. Therefore, 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 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.