General Accountant, Elnaggar & Partners
Overview
Effective from 1 January 2018, the United Arab Emirates has implemented a general tax on consumption in line with the Common VAT Agreement of the States of the Gulf Cooperation Council[1] (the VAT Agreement) signed by all member states.
VAT is 5% and applies to the customs value of imported goods, recoverable by VAT-registered businesses.
Exemptions and zero-rated items exist for certain imports.
Exported goods and services from UAE are typically zero-rated, but conditions apply.
VAT recovery and compliance vary for registered and non-registered businesses.
This Practice Note discusses the VAT regime applicable to imports and exports in the United Arab Emirates.
Definitions
Taxable person: A person who conducts an economic activity independently and for the purpose of generating income, and who is already registered or required to register for VAT in the UAE. This includes individuals, businesses, and government entities.
Taxable supplies: Supplies of goods and services made by a taxable person in the UAE, which are subject to VAT at the standard rate or zero rate.
Input tax: VAT that is paid or accrued by a taxable person on the purchase of goods and services, or on the importation of goods. Input tax can be deducted from the VAT due on the taxable person's own supplies.
FTA: The Federal Tax Authority, the government agency responsible for administering VAT in the UAE.
Import of goods: The entry of goods into the UAE from outside the GCC territory. Imported goods may be subject to customs duty, excise tax, and VAT.
Export of goods: The supply of goods from the UAE to outside the GCC territory. Exported goods are generally exempt from VAT, but may be subject to customs export controls.
First point of entry: The first customs point of entry through which goods enter the GCC territory from abroad.
Final destination point of entry: The customs point of entry through which goods enter the final destination state within the GCC territory.
Value Added Tax (VAT): A consumption tax that is applied to the value added to goods and services at each stage of the production and distribution process. VAT is charged at the standard rate of 5% in the UAE. However, there are also zero-rated supplies and exempt supplies, which are not subject to VAT.
Customs duty: A tax that is imposed on imported goods. The rate of customs duty varies depending on the type of goods being imported. Some goods, such as essential food items and medical supplies, are exempt from customs duty.
Excise tax: A tax that is imposed on certain goods and services produced or consumed in the UAE. Excise tax is currently applied to tobacco products, carbonated drinks, and energy drinks. Excise tax is paid to Customs when the goods are cleared for release.
Free zone: A designated area where businesses are exempt from certain taxes and duties, including VAT and customs duty. Free zones are typically located in strategic locations, such as ports and airports. Free zones are designed to attract foreign investment and promote economic growth.
Practical Guidance
The entry of goods into any GCC state is known as import of goods.
Similarly, the services received by a taxable recipient in the UAE that are taxable in the UAE are termed as import of services.
Goods which are located in the UAE and sold by a non-resident to a UAE resident VAT registered business are also considered “imports”.
Conversely, the supply of goods and services from the UAE to recipients outside the UAE is considered as export.
Introduction
VAT (Value Added Tax) is a consumption tax that is levied on the import and supply of goods and services in the UAE. The standard VAT rate is 5%, but there are some exemptions and zero-rated items.
VAT becomes chargeable on imported goods at the point of entry into the UAE, unless the goods are placed under customs duty suspension. For goods placed under customs duty suspension, a cash security or bank guarantee may be required to cover the VAT.
The import VAT rate is 5% and is applied to the customs value of the goods, which includes the cost of the goods, insurance, freight, and any other related costs.
VAT Registered Businesses
A Customs Import Code, issued by Dubai Customs, grants business entities the authorization to import and export shipments either from the rest of the world or from free zones to the Dubai mainland. Having a valid Import Code enables any company to engage in import and export activities within Dubai.
VAT registered businesses in the UAE have two options for paying import VAT:
Linked importer code: If the business has linked their importer code to their VAT registration through the FTA portal, the import VAT is not due at the time of importing, but is due when the importer files their VAT return.
Unlinked importer code: If the business does not have an importer code, or did not link it to their VAT number, the VAT will be paid by a third party, such as a logistics provider, who pays the import VAT on behalf of the VAT registered business in the UAE. The logistics provider then passes on the import VAT and the associated deduction to the VAT registered business in the UAE by way of a statement.
For UAE businesses that are registered for VAT and have connected their importer code to their VAT registration via the FTA portal, the application of import VAT is a straightforward process. In these cases, import VAT is not payable at the time of importing; instead, it becomes due when the importer files their VAT return.
For UAE businesses registered for VAT but lacking an importer code or not linking it to their VAT number, a third party, typically a logistics provider, assumes responsibility for paying the import VAT on behalf of the registered business. The logistics provider then conveys the import VAT and related deductions to the UAE's VAT-registered business through a statement, as outlined in Article 50 of Cabinet Decision No. 52/2017 on the Implementing Regulation of Federal Decree-Law No. 8/2017 on Value Added Tax and VAT Public Clarification Importation of Goods by Agents on Behalf of VAT Registered Persons (VATP012).
Non-VAT registered businesses, organizations not involved in economic activities, or private individuals, usually cannot import goods in the UAE directly. They must utilize courier companies' services, which have a unique status with the FTA for fulfilling their obligations related to Federal Decree-Law No. 8/2017 on Value Added Tax. When courier companies import goods on behalf of non-registered importers, the agent must declare their Tax Registration Number (TRN) or a C/O TRN on the customs declaration and bear responsibility for the import VAT. Import agents or courier companies generally have agreements with the FTA, although the FTA may also impose these obligations on them.
Certain customs suspension regimes prevent goods from being considered imports. These regimes include temporary admission, goods stored in a customs warehouse, goods in transit, and goods intended for re-export. Taxable persons can recover the import VAT, subject to general recovery conditions, by deducting it in box 10 of the VAT return. The import VAT is reported in box 6 or 7, depending on the circumstances.
Regarding the import value of goods, it is based on the customs value determined by customs legislation. VAT is applied on top of the customs value, along with customs duties and excise tax if applicable. Although Federal Decree-Law No. 8/2017 includes a correction mechanism for imports involving related parties (Article 36), this article is considered obsolete, as customs legislation already provides mechanisms for determining the appropriate value.
For temporary exports of goods from the UAE mainland to abroad or designated zones, with subsequent return, the import value is based solely on the value of the services provided, as stipulated in Article 42 of Federal Decree-Law No. 8/2017. Similar provisions can be found in customs legislation.
Non-VAT Registered Businesses
Non-VAT registered businesses, organizations not considered as conducting an economic activity, or private persons, will generally not be able to import goods in the UAE. They will need to use the services of a courier company. Courier companies enjoy a special status with the FTA to exercise their obligations in terms of the application of Federal Decree-Law No. 8/2017 on Value Added Tax. When they import on behalf of a non-registered importer, the agent will declare their own TRN or a C/O TRN on the customs declaration and will be responsible for the import VAT.
VAT Exemptions and Zero-Rated Items
Some imports may be exempt from VAT, such as:
Goods imported by military forces and internal security forces
Personal effects and gifts accompanying travellers
Used personal effects and household items transported by UAE nationals living abroad on return, or expats moving to live in the UAE for the first time
Returned goods
Other imports may be zero-rated, such as qualifying medicines, medical goods, and precious metals.
Import VAT Recovery
VAT paid by taxable persons on imports is recoverable subject to the general recovery conditions. The taxable person can deduct the import VAT incurred at customs in box 10 of the VAT return. The import VAT itself will be reported in box 6 or 7, depending on the circumstances.
Importing services
The GCC VAT Treaty provides two general rules: one for B2B (business-to-business) and one for B2C (business-to-consumer) transactions. However, in the UAE, these rules are consolidated into a general VAT rule that designates the supplier's residence as the place of supply for services.
An exception exists for services supplied by non-resident suppliers to taxable persons in the UAE. In this case, the place of supply for VAT purposes is the UAE. However, when a non-resident supplier provides services to a non-registered taxable person in the UAE, the place of supply is not in the UAE, unless it falls under a special place of supply rule, similar to exceptions in the EU (European Union).
Special place of supply rules apply to various services like transportation, real estate-related services, telecommunications, restaurants, hotels, sports, and education. VAT obligations for these services depend on the respective place of supply rule.
UAE taxable persons receiving services within the UAE must account for VAT through the reverse charge mechanism. This means the recipient reports the purchase in boxes 3 and 10 of the VAT return. It simplifies the process by having the taxable recipient of services handle any VAT due, rather than the taxable supplier. In essence, the customer assumes the roles of both supplier and recipient for VAT purposes and self-assesses any VAT due.
If non-resident suppliers provide services to non-registered UAE customers and the place of supply is in the UAE, the supplier must register for VAT in the UAE for VAT purposes. However, this requirement applies only when the place of supply is within the UAE.
Exports
In the global landscape of trade, the United Arab Emirates stands as a prominent member of the World Trade Organization (WTO), forging vital trade partnerships with approximately 32 nations worldwide. Its exports encompass a diverse range of commodities, including natural gas, crude oil, foodstuffs, and re-exported products. Moreover, Dubai, a key economic hub within the UAE, plays a pivotal role in the international market by exporting metals such as aluminum and copper, with primary trading partners hailing from Japan, South Korea, Thailand, India, and Iran. This introduction sheds light on the UAE's significant presence in the global trade arena.
VAT on exports
The export of goods from the United Arab Emirates (UAE) is zero-rated for value-added tax (VAT), meaning that no VAT is charged on the sale. This is because the place of supply of goods is the location of the goods at the time of sale, and in the case of exports, the goods are located in the UAE at the time of sale.
However, to qualify for the zero-rating, the exporter must retain evidence that the goods have been transported from the UAE within 90 days of the supply taking place. This evidence can be in the form of official and commercial documents, such as a bill of lading or a certificate of origin.
The UAE distinguishes between direct exports and indirect exports. With direct exports, the seller is responsible for the transport of the goods. With indirect exports, the buyer is responsible for arranging collection of the goods from the seller and exporting the goods. In practice, due to regulatory requirements, it is highly unlikely that a foreign buyer can export from the UAE. Therefore, in practice, agents are often used.
To report exports on the VAT return, the amount of exported goods must be reported in box 4 of the VAT return for zero-rated supplies.
Export of services
In the UAE, the place of supply for services provided by a resident supplier is considered to be in the UAE. This means that any services provided by a UAE supplier to a recipient abroad will be considered as exports of services, unless they fall under the special place of supply rules.
The UAE does not apply the GCC VAT Treaty rules, which determine that the place of supply of such a service is abroad, rather than in the UAE.
To qualify for the zero rate on exports of services to a foreign recipient, the following conditions must be met:
The recipient must be outside the UAE when the services are performed.
The recipient can be in the UAE for a short-term presence of less than a month, but their presence must not be effectively connected with the supply.
The services cannot be supplied directly in connection with real estate situated in the UAE or any improvement to the real estate, or directly in connection with moveable personal assets situated in the UAE at the time the services are performed.
The transaction must not be an abuse of the zero-rating rules. For example, if the services are received in the UAE by another person linked to the non-resident recipient of the service, and this other person in the UAE would not have a full right to recover input VAT, then the supply will be standard rated.
Services that meet the above criteria should be reported in box 4 of the VAT return for zero-rated supplies. Otherwise, the supply of services in the UAE will be subject to VAT at the standard rate of 5%.
Conclusion
As businesses and individuals engage in cross-border transactions, understanding and adhering to these VAT regulations becomes paramount. The UAE's strategic role in global trade further accentuates the importance of compliance and diligent record-keeping for all stakeholders involved. With these regulations in place, the UAE aims to facilitate seamless trade while ensuring the equitable taxation of goods and services, ultimately contributing to its continued prominence in the global marketplace.
Related Content
Legislation
Official Gazette of the UAE
Federal Decree-Law No 8/2017 on the Value Added Tax
Cabinet Decision No. 52/2017 on the Implementing Regulation of Federal Decree-Law No 8/2017 on the Value Added Tax
Cabinet Decision No. 46/2020 Amending some provisions of Cabinet Decision No. 52/2017 on the Implementing Regulation of Federal Decree-Law No. 8/2017 on the Value Added-Tax
Regulations
Common VAT Agreement of the States of the Gulf Cooperation Council[1]
VAT Public Clarification Importation of Goods by Agents on Behalf of VAT Registered Persons | VATP012[3]
Elleonor Grace E. Apostol
General Accountant
Elnaggar & Partners
Stefano Menotti
1 - INTRODUCTION When a motor vehicle is available for the use of an employee, manager, or shareholder beyond working hours, it is considered as partially used...
Ines Pinel Lorenzo
En Emiratos árabes Unidos, el matrimonio musulmán esta regulado por la Ley Federal No. 28/2005 de Estatus Personal (en adelante Ley del Estatus Pe...
Ines Pinel Lorenzo
In the United Arab Emirates, Muslim marriage is governed by the Federal Law No. 28/2005 on Personal Status (hereinafter referred as Personal Status Law or PSL)....
