Facts
A company is a legal person registered in Dubai Multi Commodities Centre (DMCC) carries on economic activity as a UAE resident company.
- This Company maintains a branch in Spain.
- The Spanish branch enters into and executes contracts for the supply of consultancy services entirely outside the territory of the UAE.
- The services are physically performed outside of the UAE.
- The DMCC head office exercises general oversight but is not involved in negotiating and concluding the contract on consulting services, nor in the execution or delivery of those services.
- This oversight is considered as Headquarter Services provided to the Branch for the purpose of applying 0% Corporate Tax rate.
Question
Do such services fall outside the scope of UAE VAT?
Analysis
Article 1 of the VAT Law defines a Taxable Supply as ‘a supply of Goods or Services for Consideration during the course of Business by any Person in the State [the UAE], and does not include Exempt Supply’. Hence, for a supply to be within the scope of UAE VAT, the place of supply must be considered inside the UAE. If this condition is not met, the supply falls outside the scope (OOS) of UAE VAT.
The treatment of support provided by a headquarters to its branch as a supply of services is a legal fiction created solely for Corporate Tax purposes. This concept is not reflected in the UAE VAT legislation. Since there is no actual supply of services by the headquarters to the branch for consideration, such support is not subject to VAT in the UAE. Only consultancy services supplied to a third party should be regarded as a Taxable Supply, provided that the place of supply is within the UAE.
The general rule concerning the place of supply of services is set out in Article 29 of VAT Law: “The place of supply of Services shall be the Place of Residence of the Supplier.” Article 32 of VAT Law defines a “Place of Residence of the supplier” as follows:
- ‘The state in which the Person’s Place of Establishment is located or where he has a Fixed Establishment, provided that he does not have a Place of Establishment or Fixed Establishment in any other state’.
- ‘The state in which the Person’s Place of Establishment is located or where he has a Fixed Establishment that is the most closely related to the supply if he has a Place of Establishment in more than one state or has Fixed Establishments in more than one state’.
This principle is reinforced by Section 7.3 of Taxable Person VAT Guide VATG001: “Where the supplier has multiple potential places of residence (e.g. the business is incorporated in one country and has branches in other countries), the place of residence will be the place that is most closely connected with the supply being made. For example, where a UAE branch of a UK company provides services under the contract signed by the branch, the supply will be most closely connected with the UAE”.
In the scenario under review, the UAE-registered DMCC head office exercises general oversight over the activities of its branch located in Spain. The branch, however, independently negotiates, concludes, and performs contracts for the provision of consultancy services within Spain.
This issue is addressed in VAT Public Clarification VATP019 to define a place of residence for the recipient of services (not a supplier). Although VATP019 addresses the determination of the place of residence for the recipient of services, its analytical framework is equally instructive when identifying the establishment most closely connected with the supply, particularly since Article 32 applies identically to both suppliers and recipients.
The FTA outlines a fact-based test for determining which establishment is most closely related to a given supply. This includes the following factors, adapted here to assess the supplier’s relevant establishment:
Assessment of the Establishment Most Closely Connected with the Supply
|
Factor |
Assessment in the Present Case |
|
Which establishment is the contractual supplier of the service? |
The Spanish branch enters into and executes the contract. |
|
Which establishment actually performs the service and delivers the benefit to the recipient? |
The consultancy services are rendered entirely by the Spanish branch within Spain. |
|
Which establishment issues the invoice and receives the payment? |
Assuming invoicing and receipt are handled by the Spanish branch, this further reinforces its connection to the supply. |
|
Which establishment receives and executes operational instructions relevant to the service? |
The branch executes the service independently. The DMCC head office is not involved in operational decision-making. |
|
Whether the services relate to the business carried on by the supplier through an establishment in a particular country? |
The consultancy function is carried out solely by the Spanish branch, separate from the UAE head office’s activities. |
Each of these considerations supports the conclusion that the Spanish branch is the establishment most closely connected with the supply, within the meaning of Article 32(2).
As such, for purposes of Article 29, the place of supply of the services provided by the branch is outside the UAE, and the transaction is therefore outside the scope (OOS) of UAE VAT.
The 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 the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies 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.
