The UAE Tax Case Study. VAT for services actually performed abroad

The facts

One company provides services to another company. Both are established in the UAE and have no foreign establishments. The services are actually performed abroad.

The question

Which VAT rate is applicable to such services?

The analysis

1. Article 31(1) of the VAT Executive Regulation determines when services shall be treated as an Export of Services and be zero-rated.

Clause (a) of this Article zero-rates them if the following conditions are met:

• 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;
• The Services are not supplied directly in connection with real estate situated in the State or any improvement to the real estate or directly in connection with moveable personal assets situated in the State at the time the Services are performed’.

Article 31(2) of the VAT Executive Regulation sets forth that ‘for the purpose of paragraph (a) of Clause 1 of this Article, a Person shall be considered as being “outside the State” if they only have a short-term presence in the State of less than a month and the presence is not effectively connected with the supply’.

The Company’s operations don’t fit these conditions since it provides its services to a local company, i.e. to a client who has a Place of Residence in the UAE and doesn’t have one abroad.

2. Nevertheless, the company may still be in a position to apply this rate.

A second option for zero-rating is specified in Article 31(1)(b) of the VAT Executive Regulation: ‘If the services are actually performed outside the Implementing States or are the arranging of services that are actually performed outside the Implementing StatesReference to Implementing States shall currently be replaced with a reference to the UAE. See details here. ’.

This rule is a perfect match with the case at hand since the services are actually performed abroad.

The conditions for a customer not to have a Place of Residence and effectively connected presence in the UAE are reserved for para. (a) of Art. 31(1), which is irrelevant for the case at hand. They are not repeated in para (b). There is no link from para (b) to para (a) to transfer those conditions to para (b).

Art. 31(2), cited above, introduces the excuse of short-term presence for the customer with a direct reference to para (a) of Art. 31(1). This leads to the conclusion that a customer’s presence is not relevant for services actually performed abroad.

3. Furthermore, 31(3) of the UAE VAT Executive Regulation provides for special regulation to be applied in such cases: ‘As an exception to paragraph (a) of Clause 1 of this Article, a supply of Services shall not be zero-rated, if the supply is made under an agreement that is entered into, whether directly or indirectly, with a Recipient of Services who is a Non-Resident, if all of the following conditions are met:

• The performance of the Services is, or it is reasonably foreseeable that the performance of the Services will be, received in the State by another Person, including, but not limited to, an employee or a director of the Non-Resident Recipient of Services.
• It is reasonably foreseeable, at the time the agreement is entered into, that that other Person in the State will receive the Services in the course of making supplies for which Input Tax is not recoverable in full under Article 54 of the Decree-Law’.

Therefore, if a Non-Resident buys the services supplied to the Resident in the State, then such Non-Residency status may not justify zero-rating. This Article also refers to para (a) of Art. 31(1), not to para (b). This points to a similar surmise that the residency status of the customer and location of the actual recipient don’t matter for services actually performed abroad.

Therefore, it is reasonable to conclude that services actually performed outside of the UAE are subject to zero rating even if:

• a client has a Place of Residence in the UAE and the services are most closely related to this place, or
• a client doesn’t have a Place of Residence in the UAE but was present in the UAE in connection with the provision of the services outside of the UAE;, or
• a client has neither a Place of Residence nor a presence in the UAE, but the services are performed abroad for someone residing in the UAE.

4. Some experts express doubts on the potential to zero-rate services which have been received by a UAE Resident. Prior to referring to the actual provision of services outside the State, Clause (1) of Article 31 of the VAT Executive Regulation says that ‘the Export of Services shall be zero-rated in the following cases’. So, para (b) of Clause (1), addressing ‘the services [that] are actually performed outside the Implementing States or are the arranging of services that are actually performed outside the Implementing States’, is a part of the ‘following cases’, i.e. part of the “Export of [a] Service”.

Article 1 of the VAT Executive Regulation defines “Export” as ‘Goods departing the State or the provision of Services to a Person whose Place of Establishment or Fixed Establishment is outside the State, including Direct and Indirect Export’. Having this in mind, some experts assert that the actual performance of services outside of the State may not be zero-rated if they are provided to a Person whose Place of Establishment or Fixed Establishment is inside the State.

5. In our opinion, this position doesn’t correspond with the content of Article 31 of the Executive Regulation because:

• Under such an interpretation, Art. 31(1)(b) doesn’t make sense, since it makes eligible those operations that are already covered by Art. 31(1)(a). Indeed, if a Person has no Establishments in the UAE, a supply is subject to the 0% rate under Art. 31(1)(a). If it has establishments in the UAE and abroad, then the actual (most closely connected) recipient of the service shall be determined; See details here. if such recipient is a foreign Establishment, then zero-rating under Art. 31(1)(a) is applicable. Again, there is no need for Article 31(1)(b). Therefore, there is no room to apply Art. 31(1)(b) if it is applicable only for the case where the recipient of the services is a foreign Establishment of a Fixed Establishment.
• Clause 4 of Article 31 of the VAT Executive Regulation provides for the actual Recipient test. This test is designed to prevent zero-rating where the actual Recipient of the Services is in the UAE, to exclude zero-rating where a ‘Person in the State will receive the Services’. There is no actual export of the services in such cases because export is the ‘provision of Services to a Person whose Place of Establishment or Fixed Establishment is outside the State’. So this clause is designed to facilitate the application of the 0% rate to operations which comply with definition of Export.

It is specifically established in this Clause that its rules are applicable ‘as an exception to paragraph (a) of Clause 1 of this Article’. There is no reference to paragraphs (b) and (c) here. The only plausible explanation is that the application of paragraphs (b) and (c) is not tied in with the definition of Export and the location of the Recipient.

• Now, it is good time to address para (c) of Art. 31(1) of the VAT Executive Regulation. It grants the 0% rate to a supply which ‘consists of the facilitation of outbound tour packages, for that part of the service’. Pursuant to Art. 31(4) of this Regulation such services consist of ‘the services that a Taxable Person provides in packaging one or more tourism products and also services outside the Implementing States, including but not limited to such goods and services as accommodation, meals, transport, and other activities’.

CA. Manu [Manoharan] Palerichal put a fair question: If Export is only supply to a non-resident ‘does it mean that an outbound tour package will be zero-rated only if it is provided to a non-resident? I believe that the intention of the law is not so. Hence if a UAE resident receives a service of an outbound tour package from a UAE company, such services may have to be treated as zero rated’.CA. Manu [Manoharan] Palerichal “What is not clarified in the recent FTA public clarification on zero-rating the export of services?”, July 29, 2020, LinkedIn.

We totally share this belief.

All above guides to infer that the ‘following cases’ mentioned in the introduction to Article 31(1) are not particular scenarios of supplies, which meet the definition of Export, but cases which shall be treated as zero-rating export regardless of how “Export” is determined for general purposes. In other words, para (b) and para (c) of the Art. 31(1) are special rules in respect to the general rule-definition, and being that special they override definition coverage.   

6. Examples from the Director’s Services VAT Guide No. VATGDS1 give hope that the FTA supports a favorable interpretation. There are two examples in Section 2.3 of the Guide.

• Section 2.3.1. ‘Director working overseas’, and
• Section 2.3.2. ‘Director providing services to overseas company’.

The first is focused on the place where the director’s services are actually performed. The location of the customer was not even considered in this example. This fits well with the version that this factor is irrelevant for services actually performed abroad.  

According to the FTA, ‘where a director who is resident in the UAE provides director’s services which are physically performed outside the GCC Implementing States, such services will be zero-rated. For example, a UAE resident director may be contracted to physically attend board meetings in the UK. The director can zero-rate the supply of these services since the nature of the services requires that they are physically performed outside the GCC Implementing States’.

The second example (Sec. 2.3.2) is resolved by the FTA in this way: ‘If a UAE resident director provides services from the UAE to a company not resident in the GCC Implementing States, the services may be zero rated if the company does not have a presence in the UAE, and the performance of the services is not received in the UAE by any person who would be able to recover VAT incurred’.

7. The VAT Public Clarification VATP019 may also be summoned to substantiate the zero-rating for a service to a UAE resident actually performed abroad.

This clarification elaborates on how a candidate for the 0% VAT rate shall comply with prohibition for the recipient of services to have a place of residence in the UAE. The clarifications on how to determine Place of Establishment of a recipient, how to choose correct Establishment for a recipient with Establishments in different jurisdictions, make up a goodly part of VATP019. We examined this Clarification in detail in the VAT Guide on B2B services.

In this Clarification, the FTA emphasized seven times that it interprets only para (a). This doesn’t make sense if strict definition of export applies to para (b). Why does the FTA circumscribe the coverage? The only plausible explanation is that the FTA follows the legislation, in particular, the structure of the Art. 31 of the Regulation. Since the legislator has established residency test only in para (a), since the law gives specifics on how this residency/presence shall work only for para (a), the FTA follows the same rout.    

8. However, the risk of an unfavorable interpretation still exists. Some fresh clarification from the FTA would come in handy for taxpayers to obtain clarity.

The disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.

The Acknowledgment

This study has benefited from the contributions of the following people: Peter Brophy, Legal Editor and solicitor advising on English law, for his remarkable editing job.

Authors: Andrey Nikonov and Maria Nikonova