The latest amendment to the VAT Executive Regulations in UAE is seen to have a sizable impact on zero rating for exported services. This amendment has garnered huge attention since it is the first such amendment to the VAT regulations almost 2 ½ years post the introduction of the value added tax system in the country. A major change has been executed for Article 31 (2) in the VAT Executive Regulations that talks about how an individual qualifies for being perceived as outside the state.
This new amendment now limits overall scope for zero-rated export services and this is the biggest change for businesses. Based on the amendment, VAT registered providers of services will now have to keep in mind whether foreign clients have fixed establishments in the UAE or not, which are linked to their service while considering whether the client has any presence in the country which is linked to the service supply and duration of this presence. Previously, any one of these conditions were to be fulfilled for service export zero-rating but VAT registered services in the country will have to compulsorily consider both conditions in the present scenario. The new amendment is expected to scale up the overall administrative load on services providers and hence businesses should obtain professional advice accordingly.
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Key things that you should remember
Prior to amendment, the version of Clause (2) for Article 31 stated that 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, or the only presence they have in the State is not effectively connected with the supply.
Now, post amendment, the version states the following- 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.
Basically, the new amendment fuses these two conditions in the original draft version while using and for replacing Or. A combination of the presence are not effectively connected with the supply and a short-term presence in the State of less than one month statements is the new regulation. Scope has therefore been limited for zero-rating service exports and both conditions should be fulfilled if the person has been outside the country in the duration when services were supplied. As a result, zero-rating for service exports will not be applicable in case foreign recipients of these services stay in the UAE for at least 1 month or more and stay in the UAE for less than 1 month but his/her presence is linked with the supply in the country. Service providers with VAT registration in UAE will now have to refrain from zero-rating services provided to foreign clients who attend just one meeting in the country, which is linked to the services he/she received.