The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published an updated version of the Executive Regulations to the Federal Decree Law No. 8 of 2017 on Value Added Tax (VAT), on its website.

This version includes updates made through Cabinet Decision No. 46 of 2020, however, the specific Cabinet Decision has not been published separately.

The main update includes a change made in Article 31(2) on the Export of Services rules. The Article now reads:

“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”.

In the updated article above, the word “AND” replaces the word “OR” and thus requires both conditions included in this Article to be met in order for a supply of services made to non-resident persons to be zero-rated for VAT purposes.

This change to Article 31(2) appears to direct that supplies made to overseas businesses which have a fixed establishment in the UAE, such as a branch or representative office, are within the scope of UAE VAT and there are limited circumstances where zero-rating is applicable.

Accordingly, where a UAE business provides a taxable service to a business established outside the UAE, further due diligence will be required to determine whether the zero-rate can be applied in practice.  

The obligation to prove that a local establishment of an overseas business is not present in the UAE may lead to an additional layer of administration for the supplier, in order for the supplier to gain comfort that VAT should not be charged.

 The ability of the UAE branch to recover the input tax incurred will need to be considered in line with the normal VAT recovery rules.  There may also be practical challenges for branches in cases where the branch may have to fund the cost of VAT (and the cost of services), where the branch considers that it has not actually been the recipient of the services at hand.

Given the change has been made to the Executive Regulations by way of a Cabinet Decision, this is a change to the existing legislation which is expected to have prospective effect, however the FTA’s interpretation of the effective date of this change has not been confirmed.

Businesses should assess the implications of this change and undertake a review of all contracts on which the zero-rate has been applied to exported services in order to determine whether this warrants any changes to the VAT treatment applied to date.

The process of determining the VAT liability applicable to such services should also be carefully reviewed, and consideration given to introducing additional controls in order to ensure that zero-rating is applied only where the conditions in the Executive Regulations are met.