Is your business in UAE registered for VAT? Make sure you’re fully aware of the different VAT rates which are applicable to the transactions of your business, particularly for sales of services.
Regulations for Value Added Tax in UAE differ depending on what you are selling, who you are selling to, and where your business is located.
The VAT rate for supply of services in the UAE
Treatment and applicability of VAT in UAE on supplies of services differ depending on several factors. This includes the location of the recipient, the location of a supplier, and the place of supply.
UAE executive regulations mandate VAT registered suppliers to charge the standard rate of five percent VAT for local supplies of products and services in UAE.
Take note: businesses that are registered in UAE with the Federal Tax Authority are required in paying the standard rate for VAT on certain notified services. The reserve charge basis is applicable for such including importation of services from other VAT-implementing GCC member countries and other countries outside the GCC states.
Businesses are allowed in reclaiming VAT as input tax if no extra taxation is reclaimable or payable for the transaction.
Certain types of services are included in the Federal Tax Authority’s list of zero-rated services under UAE VAT regulations. Zero-rated supplies of services as of 2021 are as follows:
- Exported telecommunications services
- All export of services outside VAT-implementing GCC states
- International transportation services intended for goods and passengers, including all other kinds of transport-related services
- Healthcare services
- Education services
Exempt from VAT
The supply of a certain number of financial services is considered exempt from VAT in UAE as they’re outside the scope of VAT. This includes late payment fees, interest income generated from a bank deposit, and forex profit and loss realized.
How does place of residence affect VAT treatment for services?
UAE businesses registered for VAT in UA E are only entitled in applying zero rates for VAT on services that are supplied if the recipient’s establishment is outside of UAE. Public Clarification issued by the FTA, VATP019, sets out the criteria that are to be considered to determine the establishment should there be uncertainty with regards to whether a supply for a service is a UAE or foreign establishment. They are as follows:
- Which establishment is a supply’s contractual recipient;
- Which establishment is benefiting from a supply;
- Which establishment is going to receive the notice, then make a payment for a supply;
- Which establishment has provided instructions to a supplier;
- If the services are in relation to business carried out by a recipient through the establishment that’s in a different country
A business outside the UAE that is a recipient of a supply of service won’t be considered outside of the UAE when it creates a temporary presence within the country. This is for at least one month during the time a service was performed, relating to a supply that was or being made.
VATP019 also provides some examples whereby a person may be considered as outside UAE only when presented in UAE was short term or less than one month. The presence should also not be connected effectively with a supply of a service.
How can a business determine the applicability of zero-rating for services?
With the recent release of the FTA Public Clarification, businesses are expected to carefully consider whether or not criteria for zero-rating for VAT are satisfied. They are also to ensure appropriate supporting evidence e.g. tax invoice is maintained. Businesses that have a high volume of transactions overseas often have trouble in determining zero-rating applicability for the supply of services. FTA has seen overseas transactions to be effective in presenting a challenge. To help VAT-registered businesses, the following questions are to be considered:
- If the overseas customer has a presence within the UAE, is the local presence connected directly or in a way with a supply that is made?
- Is the UAE-registered business aware if an overseas customer has some sort of presence within the UAE and is the presence longer than a month?
- Does the onboarding process of the UAE-registered business identify whether the customer has a UAE presence?
- Does the contract standing contemplate the situation wherein VAT may be chargeable either now or for the future?
- Is the UAE-registered business allowed in charging VAT alongside the value of a supply of service and would the recipient of the supply be obliged in paying it?
Businesses that supply services to customers that are overseas should review their arrangements carefully. This is to make sure that the correct treatment for VAT is applied. Businesses, to this end, are to explore the expanding procedures for customer identification and amend contracts as they see fit.
For assistance in complying with your VAT obligations in UAE, contact us here in VAT Registration AUE today!