Whether to apply zero-rating to the export of services and how to do so, has been a recurring concern amongst businesses in the UAE, especially to those providing consultancy services. Federal Law no. 8 of 2017 on Value Added Tax (“VAT Law”) and Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law no. 8 of 2017 on Value Added Tax (“Executive Regulations”) have clearly defined the services which are zero-rated and those that are exempt.
Art. 29 VAT Law stipulates that the place of supply of services shall be where the supplier has their place of residence. Art. 31 of the Executive Regulations specifies conditions on zero-rating the export of services. The question then becomes which article to apply for clients based outside of the GCC.
The VAT rules on zero-rated export services are quite specific and must be read together with the place of supply rules in order to clearly understand the exact VAT treatment of the service. It is crucial however to determine the exact nature of the services being provided, and what the services are in relation to.
General Rules for Export of Services:
Art. 31 of the Executive Regulations stipulates that the supply of services shall be zero-rated if all of the following conditions are met:
- Services are supplied to a recipient who does not have a place of residence in an “implementing state” (GCC states) and who is outside the UAE at the time the services are performed and
- Services are not supplied directly in connection with:
- Real estate situated in the UAE or any improvement.
- Moveable personal assets situated in the UAE at the time the services are performed.
In addition, services shall also be zero-rated where:
- Services are actually performed outside the implementing states or are the arranging of services that are actually performed outside the implementing states.
- The supply consists of the facilitation of outbound tour packages.
Exceptions to Applying Zero-Rating to the Export of Services
Art. 31 of the Executive Regulations stipulates that as an exception to the general rule of zero-rating the export of services, 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 non-resident recipient if all the following conditions are met:
- The performance of the services is (or reasonably foreseeable that the performance of the service will be) received in the UAE by another person, including but not limited to an employee, or a director of the non-resident recipient of services; and
- It is reasonably foreseeable at the time the agreement is entered into that the recipient in the UAE will receive the services in the course of making supplies where input tax is not recoverable in full (i.e. making exempt or partially exempt supplies).