Can an Offshore Company Register for VAT in the UAE
Value Added Tax compliance for offshore companies registered in the UAE is always a debatable and confusing concept. Most of the owners of offshore companies have the understanding that offshore companies are not required to comply with VAT regulations, including VAT registration in the UAE. This information is partially correct, and through this article, we are going to examine and find out an answer.
Let us start with a quick brief about VAT in the UAE. Value Added Tax was implemented in the UAE with effect from 1st January 2018. Over a period of time, the Federal Tax Authority and Ministry of Finance, UAE, have issued many decisions and guides to clarify the concepts of VAT. The table below will give you clarity on the VAT rates and different types of supplies under VAT Law for a UAE company.
Please note that this is a simple summary, and there are conditions attached to certain supplies when classifying under UAE VAT.
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Any goods sold inside the UAE (at the time of sale, the goods are located in the UAE) |
Subject to VAT @ 5% |
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Any goods sold from the UAE to outside the UAE are considered |
Subject to 0% |
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Any goods imported to the UAE |
5% VAT on import applicable for most of the goods (Reverse Charge Mechanism) |
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Any goods sold as high-sea sales (movement of goods is from outside UAE to outside UAE) |
Out of scope under UAE VAT |
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Any services provided inside the UAE |
Subject to VAT @ 5% |
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Any services provided to an outside UAE client |
Subject to VAT @ 0% |
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Certain special services (for example: real estate services, electronic services) |
Place of supply is determined based on the special rule, and if the place of supply is outside the UAE, UAE VAT will be out of scope. |
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Certain services provided inside the UAE |
Subject to VAT @ 0% (Example: international transportation, educational services, first supply of residential properties) |
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Certain services provided inside the UAE |
Classified as exempt supply under UAE VAT (example: local transport passenger, Bare Land, supply of residential properties, excluding the first supply within 3 years of completion of construction) |
When should a taxable person apply and get the VAT number?
The mandatory threshold for VAT registration is AED 375,000/- in the previous 12 months or expected to cross the threshold in the coming 30 days. Failure to register before the deadline can attract administrative penalties and interest, as the case may be. While considering the VAT registration threshold amount, you always need to consider the combination of the below figures for the last 12 months and what is expected in the coming 30 days:
- Any VAT supply @ 5%
- Any VAT supply @ 0%
- Any import of goods or services to the UAE.
With the above light on the different types of supplies, let us understand, for offshore companies in the UAE, what offshore companies are permitted to do, prohibited from doing, and how UAE VAT is going to impact.
In the UAE, offshore companies can be established with 3 authorities.
- Jebel Ali Free Zone Authority (JAFZA)
- Ras Al Khaimah Economic Zone (RAKEZ)
- Ajman Free Zone Authority (AFZA)
What offshore companies are permitted to do? A few examples are as follows:
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Offshore companies can open bank accounts in the UAE.
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Offshore companies can hold properties in the UAE.
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Offshore companies can hold intellectual property in the UAE.
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Offshore companies can do high-sea sales (movement of goods from outside UAE to outside the UAE).
- Offshore companies can provide services to international clients.
What offshore companies cannot do? Below are a few examples:
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Offshore companies cannot have a physical office in the UAE. The registered office address of the offshore companies is always the address of the registered agent. Keep in mind that offshore companies in the UAE can be established only through a registered agent like Flyingcolour Business Setup Services.
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Offshore companies cannot avail of visas under the company.
- Offshore companies are not allowed to use any port in the UAE (seaport or airport) for trading purposes.
Regulations and Articles are not quite easy to understand. So let us discuss a few examples/case studies on the business activity of an offshore company and the relevant VAT applicability based on our analysis in this article so far.
Case-1
ABC Limited, a company registered in RAKEZ Offshore, is conducting the below business activities:
- Trading activity: Goods are purchased from Brazil and sold in Canada without bringing the goods to the UAE. In the past 12 months, ABC Limited has earned 5 million Dirhams.
- Consultancy activity: Management consultancy services provided to a UK client and earned 1 million dirhams in the past 12 months.
Value-Added Tax Implication
- Income from trading is outside the scope of UAE VAT.
- Income from consultancy to a UK company is considered an export of services (services provided to a foreign company), and this supply is considered zero-rated. The revenue earned in the past 12 months has exceeded the mandatory threshold for VAT registration (AED 375,000/-). Thus, ABC Limited is obligated to apply for VAT registration within 30 days from the date of exceeding the mandatory VAT registration threshold.
Case-2
Platinum Limited is an offshore company registered under JAFZA. Below is the income generated by Platinum Limited in the previous 12 months.
- Platinum Limited is holding a residential property in Dubai that is given on lease. The income received by way of rent is AED 100,000/-.
- Platinum Limited holds a commercial property in Dubai, and through this, the company earned a rental income of AED 150,000/-.
- The company is holding a trademark. By giving the trademark for usage to a Dubai mainland company and earning a revenue of AED 100,000/- as a royalty.
Value-Added Tax Implication
- Rental income from residential property is considered an exempt supply as per the UAE VAT regulations.
- Rental income from residential property located in the UAE is considered a standard-rated supply (5% VAT rate) in VAT regulations.
- Royalty income received from a mainland company is considered a standard-rated supply in the VAT regulations.
In order to determine the VAT registration threshold, we are not required to consider the exempt supplies as per UAE VAT Law. The income from standard-rated supplies is income from rent from commercial property (AED 150,000/-) and income from trademark royalty (AED 100,000/-). The total income generated by Platinum Limited in the previous 12 months that needs to be considered for determination of the VAT registration threshold is AED 250,000/-.
To conclude, Platinum Limited is not obligated to register for UAE VAT. However, Platinum Limited can voluntarily register for VAT since the revenue has exceeded AED 187,500/- in the previous 12 months.
FAQ
1. Can an offshore company register for VAT in the UAE?
Yes. If an offshore company has taxable supplies worth more than AED 375,000 in a 12 month period then it will need to register for VAT. However, voluntary registration can be done once you have taxable supplies above AED 187,500.
2. What is the compulsory registration threshold?
AED 375,000 of taxable supplies and imports in the last 12 months or likely to exceed in the next 30 days.
3. Are offshore companies exempt from VAT in the UAE?
No. Offshore companies are not exempt. They will need to consider if they have taxable supplies over the compulsory threshold of AED 375,000 including zero rated supplies to overseas clients.
4. Do I pay VAT on income received from sales made in the high seas?
No. Sales made in the high seas (goods moved from outside the UAE to outside the UAE) are out of scope and do not count towards the threshold.
5. What is the rate of tax on services provided by an offshore company to overseas clients?
Zero-rated supplies to clients outside the UAE, so no tax is payable. This income still counts towards your AED 375,000 threshold.
6. What supplies are not included in the VAT registration threshold?
Supplies that are exempt, such as renting property, will not be included in the threshold. Only supplies that are standard rated, zero rated and imports will be considered for compulsory registration.
7. How long do I have to register for VAT once I have exceeded the threshold?
You will need to register within 30 days of exceeding the AED 375,000 threshold. If you do not register on time you may face administrative penalties and interest from the Federal Tax Authority.
To learn more about VAT for Offshore Companies in UAE, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.