On November 15, 2024, a significant amendment to the UAE VAT Executive Regulation will come into effect, reshaping the way VAT is applied to the export of services. Previously, Article 31(1)(a) permitted zero-rating for services supplied to recipients who did not have a place of residence in the UAE and who was outside the State at the time the services were performed. The amended version introduces a new condition. This amendment affects services deemed to be supplied within the UAE or Designated Zones under specific provisions of Articles 30 and 31 of the VAT Law. As a result, certain services, even those performed for non-residents, may no longer be eligible for zero-rating. This article explores the practical implications of this new rule on various types of services.
New wording
Article 31(1)(a) provides for the conditions for zero-rating the “Export of Services” in cases where ‘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’. This Article has been amended with a new condition. From November 15, services ‘treated as being performed in the State or in a Designated Zone under Clauses 3 to 8 of Article 30 and Article 31’ of the VAT Law cannot be zero-rated.
General consideration
For these services, this effectively means that they will never be zero-rated:
- if a Place of Supply for them is in the State, the new rule prohibits the zero-rating;
- If a Place of Supply is outside the State, such services are out of scope and zero-rating is irrelevant.
The Services affected
Here is the list of these services:
| Services linked to Goods | Services provided on Goods, such as installation of Goods supplied by others. The place shall be where said Services were performed (Art. 30(3) of the VAT Law). Therefore, the installation of goods in the UAE for an overseas customer without presence in the State is subject to the 5% VAT under the new rule. |
Example 1
The overseas supplier sold the goods to a customer in the UAE under the obligation to install them. The supplier retained a local provider to install the goods. Previously, the provider was able to apply the 0% VAT rate because:
- There was no prohibition on having a Place of Supply in the State for the zero-rating. This condition was newly included as a new sub-paragraph (c) in Article 31(1)(a) of the Executive Regulation.
- earlier, sub-paragraph (b) of this Article prohibited zero-rating for the Services ‘supplied … directly in connection with moveable personal assets situated in the State at the time the Services are performed’. The word ‘personal’ is excluded by the Cabinet in the new edition of this rule.
Hence, the new rule explicitly prescribes 5% VAT for these services.
| Lease of transport | Supply of means of transport to a lessee who is not a Taxable Person in the UAE and does not have a TRN in an Implementing State. The place of such supplies ‘shall be where such means of transport were placed at the disposal of the lessee’ (Art. 30(4) of the VAT Law). |
In my view, nothing will change for these services. Article 30(1)(a)(1) has already contained a prohibition of the zero-rating when ‘the Services are supplied to a Recipient of Services … who is [not] outside the State at the time the Services are performed’. If a lessee or an authorized person receives the transport in his disposal in the UAE, Article 30(1)(a) of the Regulation is not available to substantiate zero rate.
However, in this case it is worth considering Article 30(1)(b) of the Regulation, which permits the zero-rating for ‘the services are actually performed outside the Implementing States or are the arranging of services that are actually performed outside the Implementing States’.
The rental fees for periods of outbound exploitation fall within this description. Article 30(1)(b) has not been modified, but the condition we consider located in Article 30 (1)(a), which is not affected by the change.
| Restaurant, hotel, catering |
The supply of restaurant, hotel, food and drink catering Services (Art. 30(5) of the VAT Law). The place where these services are actually performed shall be the place of supply. |
These services can hardly be zero-rated earlier being performed in the UAE. Their place of performance is tied to the location of beneficiary. Even if a foreign person with no presence in the UAE orders these services for someone else, the latter has to enter the UAE to consume them.
Article 30(3) of the old Executive Regulation has already excepted from the zero-rating the services for which ‘it is reasonably foreseeable that the performance of the Services will be, received in the State by another Person’, who is not able to recover full VAT on them.
| Cultural, artistic, sporting, educational | Supply of any cultural, artistic, sporting, educational or any similar services. The place of Supply for them ‘shall be where such Services were performed’. (Art. 30(6) of the VAT Law). |
Example 2
An international art collector based in France commissions a Dubai-based artist to create a bespoke sculpture. The agreement is that the sculpture will be created and exhibited at a prominent Dubai art gallery before being shipped to France. The artist will also be assigned by art collector to give a public live performance in Dubai, explaining the creative process to gallery visitors. The collector will not attend the exhibition in person but will receive photos, video footage, and a detailed report of the event and the artist's performance.
The Supplier in this Example is the Dubai-based artist who creates and exhibits the sculpture.
The Service, which could be subject to VAT if supplied in a way of Business, is the live artistic performance (physically performed in the UAE).
The customer for this service is a foreign art collector based in France, who is not present in the UAE during the performance.
Under new Regulation, such services cannot be zero-rated.
| Real estate |
The place of supply for Services related to real estate shall be where the real estate itself is located (Art. 30(7) of the VAT Law). |
For these services, the change to the rules means little. Article 30(1)(a)(2) already prohibits zero-rating for the Services, which are ‘supplied directly in connection with real estate situated in the State or any improvement to the real estate…’.
| Transport and related | Transportation Services or Transport-related Services. Their Place of Supply ‘shall be where the transportation starts’ (Art. 30(8) of the VAT Law). The changes here should apply only for those services which are not covered by the special rules established by Article 33. |
Example 3
| Electronic and Telecommunication | Telecommunications and electronic Services (Article 31 of the VAT Law). They are deemed to be supplied in the UAE ‘to the extent of the use and enjoyment of the supply in the State’. |
Example 4
An Australian-based e-commerce business contracts with a Dubai-based web hosting provider to host a mirror version of its website specifically targeted to customers in the UAE. The website is hosted on servers located in Dubai to ensure faster load times and better performance for UAE-based users, supporting the company's business expansion into the UAE market. The hosting service is used exclusively for this UAE-targeted website.
The Australian company has no physical presence in the UAE (no employees or representatives), and the service is not purchased for third parties. However, the company provides the service for its own direct use to support its business operations in the UAE, specifically for catering to its UAE customer base.
Here, the service involves a UAE-hosted website targeting users in the UAE, ensuring optimal performance for UAE customers. The place of use and enjoyment is in the UAE since the hosting infrastructure and the targeted customer base are within the country.
Earlier, the Dubai-based web hosting provider can consider applying the zero VAT rate on this supply. This option is not feasible under new rule (c) in Article 31(1)(a).
Conclusion
By introducing the new condition, the UAE Cabinet has closed several opportunities for applying the zero-rate to services with a place of supply in the UAE, even when the customer is outside the country. Businesses that supply services such as installation, leasing of transport, cultural and artistic services, and others listed in the regulation will need to review their VAT treatment practices and adjust their compliance strategies accordingly. As the November 15, 2024, deadline approaches, it will be essential for affected businesses to adapt to these new requirements to ensure they remain compliant with the UAE VAT regime.
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 status of the author’s opinion only. Like any human job, it may contain inaccuracy 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.
