How does the reverse charge mechanism work in the UAE?

Article (9) Receiving Goods and Services 1. If the Taxable Person in a Member State receives taxable Goods or Services from a Person who is a resident in another Member State, then he shall be deemed to have supplied these Goods or Services to himself and the Supply shall be taxable in accordance with the Reverse Charge Mechanism. 2. If a Taxable Person residing in a Member State receives Services from a person who is not resident in the GCC Territory, then that Person shall be deemed to have supplied these Services to himself and the Supply shall be taxable according to the Reverse Charge Mechanism. Page 5 of 26 26 من5 صفحة Chapter Three Place of Supply Part One Place of Supply of Goods

declare it in their VAT return. It should be noted that this “self-accounted” VAT may be able to be recovered by the recipient as input tax in accordance with the normal input tax recovery rules (see Chapter 10). The reverse charge mechanism applies where:      the place of supply is in the UAE; the supply would be subject to VAT in the UAE; the supplier’s place of residence is outside the UAE; the recipient’s place of residence is in the UAE; and the recipient is VAT registered in the UAE. In addition to the conditions set out above, the reverse charge mechanism also applies where a registered person imports goods from outside the UAE. Please see Chapter 9 on imports for more information. The purpose of the reverse charge mechanism is to reduce compliance and the administrative burden of collecting VAT from non-resident suppliers. Furthermore, it puts the recipient in the same position as they would have been if they acquired the goods or services from a domestic supplier, thereby ensuring that domestic UAE suppliers are not disadvantaged by VAT not being collected from purchases from abroad. Example 10 XYZ LLC is a VAT registered business in the UAE. They purchase consultancy services from a law firm located in the UK for AED 30,000. The UK supplier will not charge UK VAT to XYZ LLC but will issue an invoice for AED 30,000. Since the place of supply is in the UAE and the consultancy services would be subject to UAE VAT at 5%, XYZ LLC must calculate the VAT due on the acquired services (AED 30,000 x 5% = AED 1,500). This VAT must be declared by XYZ LLC as output tax in their tax return, as if they had made the supply themselves. XYZ LLC can also consider whether or not they can recover this VAT incurred as input tax in accordance with the normal VAT recovery rules. 28 VAT Guide | Taxable Person | VATG001

4.3. Imposition of VAT The place of supply of electronic services determines whether or not the services are subject to VAT in the UAE. Where the place of supply is outside the UAE, no UAE VAT would apply. In contrast, where the place of supply is in the UAE, the supply will fall within the UAE VAT net. The default VAT rate on a taxable supply of services in the UAE is 5%. The supply may, however, be zero-rated if it falls under any of the zero-rating scenarios in Article 45 of the Decree-Law. For example, a supply of an electronic service of distance learning which is automatically delivered over the internet may be zero-rated if it is covered by Article 45(13) of the Decree-Law, read with Article 40 of the Executive Regulation. 4.4. Accounting for VAT Similar to supplies of goods discussed in Part 3.3.2 of this Guide, the responsibility for accounting for VAT on any taxable supply of electronic services in the UAE typically lies with the taxable supplier of those electronic services, unless the reverse charge mechanism applies. In respect of cross-border supplies of electronic services into the UAE (i.e. import of services into the UAE from abroad), the reverse charge mechanism applies where the supplier does not have a place of residence in the UAE and the recipient is either registered or required to register for VAT in the UAE.30 Where the reverse charge mechanism applies to a supply, the recipient, rather than the non-resident supplier, must account for the VAT to the FTA at the applicable VAT rate. The VAT should be charged on top of the agreed price for the electronic services.31 Since the reverse charge mechanism is an exception to the default rule of accounting for VAT, it should only be used where the supplier can ascertain that all of the conditions for the application of the reverse charge are met. If the non-resident supplier cannot ascertain the necessary particulars for the application of the reverse charge mechanism to a particular supply, then the responsibility to account for VAT remains with the supplier. Since the reverse charge mechanism is only applicable when specific conditions are met, taxable supplies from the same non-resident supplier of electronic services may be subject to different VAT accounting treatments – while a taxable supply made to a UAE taxable person would be subject to the reverse charge mechanism under Article 48(1) of the Decree-Law, the same supply made to a non-taxable person would not be subject to the reverse charge mechanism and would continue being the obligation 30 31 Article 48(1) of the Decree-Law. Article 48(4)(a) of the Executive Regulation. 23

This is not an official Translation: Application of the Reverse Charge Mechanism on Electronic Devices among Registrants in the State for the purposes of Value Added Tax Cabinet Decision No. 91 of 2023 – Issued 25 August 2023 (Effective 60 days after publishing in the Official Gazette) The Cabinet has decided: - Having reviewed the Constitution, - Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments; - Pursuant to what was presented by the Minister of Finance and approved by the Cabinet.