Export of Services and recent FTA Clarification

The Article explains the recent Federal Tax Authority (FTA) clarification on export of services and conditions attached to it.

Article (31)

Zero-rating the Export of Services

1. The Export of Services shall be zero-rated in the following cases - 

a. If the following conditions are met:

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.

2) 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.

b. If the services are actually performed outside the Implementing States or are the arranging of services that are actually performed outside the Implementing States.

c. If the supply consists of the facilitation of outbound tour packages, for that part of the service.

2. 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.

b. If the services are actually performed outside the Implementing States or are the arranging of services that are actually performed outside the Implementing States.

c. If the supply consists of the facilitation of outbound tour packages, for that part of the service.

2. 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 only presence they have in the State is not effectively connected with the supply.

3. 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:

a. 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.

b. 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.

4. For the purposes of paragraph (c) of Clause (1) of this Article, services that consist of the “facilitation of outbound tour packages” means 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.

FTA clarification :

31.1.a..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 :

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.

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.

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.

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.

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)3.

Examples:

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.

• 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:

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.

Source : FTA clarification VATP019

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