Issue

Taxable persons are required to impose VAT on every taxable supply and deemed supply made by that person in the UAE. VAT is also imposed on the importation of concerned goods. ^[1]

The supply of goods within a designated zone is generally regarded as being outside the scope of UAE VAT, unless the goods are supplied to be consumed. For the purposes of this Public Clarification, a designated zone is not considered to be within the UAE unless stated otherwise.

In instances where goods are supplied within a designated zone for consumption (within or outside the designated zone) the place of supply of these goods shall generally be in the UAE, unless a specific exclusion applies. In lieu of such an exclusion, such supplies may potentially be subject to double taxation, i.e. on the transfer of ownership of the goods as well as on importation thereof. ^[2]

The place of supply of services is generally regarded as being inside the UAE if supplied in the designated zone. ^[3] In lieu of a special exclusion, the place of supply of shipping or delivery services in respect of goods moved from a designated zone is in the UAE and may require non-resident suppliers of these services to register for VAT in the UAE. ^[4]

In order to avoid double taxation on goods supplied from a designated zone, and to provide registration relief to non-resident suppliers who also ship or deliver these goods, Article 51 of Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax, was amended by Cabinet Decision No. 88 of 2021 ("Executive Regulation"), with effect from 30 October 2021.

This Public Clarification provides guidance on the application of Article 51(5) and (7) of the Executive Regulation.

Summary

Article 51(5) of the Executive Regulation^[2] was amended to treat the supply of goods in the designated zone as outside the scope of UAE VAT if the goods are consumed outside the designated zone, provided evidence is obtained and retained that:

• the goods were delivered to a place outside the UAE; or

• VAT was paid on the importation of those goods into the UAE.

For purposes of this Public Clarification, the goods mentioned in the previous paragraph are collectively referred to as "Qualifying Goods" where all the requirements of Article 51(5)(b) or (c) of the Executive Regulation are met. ^[2]

The service of shipping / delivery of Qualifying Goods is also outside the scope of UAE VAT if supplied by the same supplier of the goods, provided the supplier is a non-resident who is not registered for VAT in the UAE. ^[5]

Detailed discussion

General

Taxable persons are required to impose VAT on all taxable supplies made in the UAE. ^[6] Designated zones specified by a Cabinet Decision are generally treated as being outside the UAE if they meet the requirements listed in Article 51(1) of the Executive Regulation, which include that the area is fenced and has security measures and Customs controls in place to monitor entry and exit of individuals and movement of goods. ^[7]

As an exception to the above, where goods are supplied within a designated zone, and the goods are intended to be consumed in or outside the UAE, such goods shall generally be regarded as being supplied in the UAE.

The term "consumed" is interpreted broadly as including any utilisation, application, employment, deployment or exploitation of the goods. The resale of purchased goods is not treated as consumption of the goods. Therefore, a supply of goods would be outside the scope of UAE VAT if the purchaser intends to sell them.

However, the place of supply of goods will be regarded as being outside the UAE, if one of the following exclusions applies:

1. The goods are:

   • Incorporated into,

   • attached to,

   • become part of, or

   • used in the production of,

   another good in the same designated zone, and that such other good is not consumed.

   For the purposes of this Public Clarification, the above terms are collectively referred to as "production" of another good.

2. The goods were delivered to a place outside the UAE, and the supplier retains:

   • Customs evidence proving that the goods were moved from the designated zone; and

   • Supporting commercial or official evidence proving the delivery of the goods to a place outside the UAE.

3. The goods were moved from the designated zone to a place within the UAE, and the supplier retains a document issued by the relevant Customs Department, proving that the goods have been imported as well as proof that VAT was settled on the same.

The onus is on the supplier to ensure that it treats a supply correctly for VAT purposes. Therefore, as a general rule, suppliers should not treat supplies of goods as being outside the scope of UAE VAT, unless they are satisfied that one of the above exclusions applies.

1. Goods incorporated/attached to/become part of/are used in production of other goods

   For this exclusion to apply:

   • there has to be a direct connection between the purchased goods and the resulting goods after production, and

   • the resulting goods should not be supplied to be consumed.

   If the above two conditions are met, the place of supply of the goods will be outside the UAE and, therefore, outside the scope of UAE VAT.

2. Goods delivered outside the UAE

   For this exclusion to apply, all of the following conditions must be met:

   • the goods are moved from the designated zone to be delivered outside the UAE;

   • the supplier obtains and retains the relevant Customs documents proving the movement of the goods from the designated zone; and

   • the supplier retains commercial or official evidence that the goods were delivered to a place outside the UAE.

   In instances where the goods will be moved from the designated zone to be delivered outside the UAE, consumption would generally be regarded as taking place outside the UAE. Hence such instances shall be regarded as having a place of supply outside the UAE.

   However, in order to prove that the goods were moved from the designated zone, the supplier should obtain and retain the relevant Customs documents reflecting the movement of the goods from the designated zone.

   The supplier will also be required to retain commercial or official evidence that the goods were delivered to a place outside the UAE.

   If the above conditions are met, the place of supply of the goods will be outside the UAE and, therefore, outside the scope of UAE VAT. If any of these conditions are not met, the place of supply would be in the UAE and within the scope of UAE VAT.

3. Goods delivered in the UAE

   For this exclusion to apply, all of the following conditions must be met:

   • the goods are moved from the designated zone to be delivered in the UAE; and

   • the supplier retains official evidence proving that the goods were imported as well as evidence that VAT has been paid on that import.

   In instances where the goods will be moved from the designated zone to be delivered in the UAE, consumption would generally be regarded as taking place in the UAE. In this instance, VAT would also be levied on the importation of the goods, resulting in potential double taxation. Hence, the Executive Regulation was amended to allow such supplies to be regarded as having a place of supply outside the UAE, provided certain requirements are met.

   In order to treat such supply as outside the scope of UAE VAT, the supplier will be required to retain official evidence proving that the goods were imported as well as evidence that VAT has been paid on that import.

   In this context, the term "official evidence" refers to import documents issued by the local Emirate Customs Department in respect of the goods entering the UAE, for example stamped import declarations.

   It is acknowledged that the import may take place after the goods are sold, and that it would be impractical in such a case to obtain the proof of import and payment before the goods are actually imported.

   The supplier may, therefore, treat such sale as outside the scope of UAE VAT, if it has proof that the goods will be imported into the UAE. This would include instances where the supplier is responsible to import and deliver the goods to an address in the UAE.

   Furthermore, the registered supplier shall retain proof that the goods were imported and that VAT was settled on the import before submitting the VAT return for the tax period in which the sale was made in order to treat the sale as outside the scope of UAE VAT.

   If any of the above conditions are not met, the sale of goods for consumption shall be treated as being within the scope of UAE VAT and subject to VAT at 5%, unless it qualifies for zero-rating, as well as subject to import VAT.

Shipping and delivery services

Under the general rule, the place of supply of any service supplied in a designated zone is considered to be in the UAE.

As an exception to the general rule, shipping or delivery services supplied directly in connection with Qualifying Goods will be outside the scope of UAE VAT if all of the following requirements are met:

• The shipping or delivery service is supplied by the same supplier of the goods;

• The supplier of such goods is a non-resident, and not registered for VAT in the UAE;

• The goods are sold via an electronic sales platform; and

• The supplier of the goods is not the person owning the electronic sales platform.

The term "electronic sales platform" means any type of online sales platform, including websites and electronic applications, which bring together third-party sellers and buyers and through which goods may be sold and purchased with or without shipping or delivery services.

The impact of this amendment is that non-residents who are not registered for VAT in the UAE will not be required to register for VAT if they only sell the goods to which the abovementioned exceptions apply, on an electronic sales platform, and they ship or deliver these goods to customers.

Private Clarifications previously issued

Persons to whom Private Clarifications were issued from the FTA in relation to Article 51 of the Executive Regulation should consider the impact of the abovementioned amendments and may apply for new private clarifications, where applicable.

Legislative References

In this clarification, Federal Decree-Law No. 8 of 2017 on Value Added Tax is referred to as "Decree-Law" and Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as "Executive Regulation".