VAT Case Study: Failure to Apply the Correct VAT Rate on Export of Services

VAT Case Study: Failure to Apply the Correct VAT Rate on Export of Services

Disclaimer: The company names and details mentioned in this case study are fictional and have been created solely for illustrative and educational purposes. Any resemblance to real entities is purely coincidental.

According to the UAE VAT Executive orders, some exports of services may qualify for zero-rated VAT. But the conditions require proper documentation and evaluation of the beneficiary's location and occupancy in the UAE. In this case study, we assess a Dubai-based service provider who mistakenly levied 0% VAT on the international consulting services; later on, FTA came back to him and imposed penalties.

Background of the Company

Company Name: Zainab Advisory FZ-LLC

Location: Dubai Internet City

Activity: Business development consulting and strategies, Management, 

Annual Revenue (FY 2023): AED 5.7 million

Clients: worldwide and local clients in the GCC, Asia, and Europe

Zainab Advisory FZ-LLC offer top-notch brand strategy and consulting solutions to companies based outside the UAE. The company believed its services qualified for zero-rating under Article 31-1-a of the UAE VAT Executive Regulations.

Objective

Zainab Advisory aimed to: 

• Ensured compliance with FTA conditions for service exports; 
•  Maintained competitiveness for clients worldwide by eliminating tax costs; 
•  Applied 0% VAT to invoices sent to clients outside the United Arab Emirates. 

The team issued multiple tax invoices between 2023 and 2024, applying the zero rate.

Reference: Article 31 - Export of Services

As per the Cabinet Decision No. 100 of 2024 (effective March 2025), there are certain conditions where Zero rated can be levied on a service exported to a non-resident recipient only if:

1. The recipient should not be a resident of the UAE

2. The recipient should not have a place of  business in the UAE associated with the supply, 

3. At the time of supply, the recipient should be outside the UAE 

4. The service is not associated with real estate or merchandise in the UAE directly.

The burden of proof is upon the supplier to possess proper documentation.

What Went Wrong

• Zainab's client was formed in the United Kingdom, UK, but they had a communication office in the UAE.
• Zainab did not ask for a declaration or confirm the UAE's presence; instead, the UAE office actively coordinated and received the consulting deliverables.
• According to the FTA audit, the client was not eligible for zero-rating since they had a fixed establishment in the United Arab Emirates.

The FTA consequently rejected the zero-rating of services valued at AED 1.8 million and reclassified them as standard-rated at 5%.

Results of the FTA Audit

Following a desk audit, the business was notified that it needed to provide:

• Evidence that the customer was not in the United Arab Emirates at the time of delivery; 
• A statement attesting to the lack of a UAE establishment; and 
• Records of all email exchanges, deliverable locations, and billing information.

The business was unable to prove that Article 31(1)'s requirements were fulfilled.

Effect on the company

• Additional fines for late payments and inaccurate VAT returns;
• Damage to the client's reputation as a result of the client disclosing the VAT reissue 
• (AED 1.8M * 5% ) AED 90,000 VAT liability was imposed 

The team needed to either recover VAT from the client or cover the expense internally, issue credit notes, and re-invoice with 5% VAT.

Lessons Learned

1. Residency Is More Than Just Legal Incorporation: A client's operational presence within the UAE may disqualify them from zero-rating, even if they are legally based outside of it.

2. Zero-Rating Is Not Automatic: Article 31's requirements are stringent and require a lot of documentation.

3. Encumbrance load is on the supplier: Supplier must ensure and verify the documents which prove the recipient's location and the establishment status, at the time of supply.

Diminution Step Taken

Zainab's advice after the Audit,

• Checked all past export invoices for compliance audits. 
• Developed a VAT Export Checklist covering all necessary declarations.
• Modified contracts to add clauses which confirm non-residency and fixed establishment.
• Instructed personnel to perform due diligence before applying zero rating.

 Compliance Recommendations

• To meet with the compliance, a signed declaration from the client stating that they do not have any fixed establishment inside the UAE. 
• There should be written proof that the services are fully performed and utilised outside the UAE.
• Need to be sure that where the benefit of services is received, it plays a very important role in determining VAT treatment. 
• Audit, Billing records, Email records and locations of delivery should be maintained.

 How Flying Colour Tax Consultant Can Help in this,

At Flying Colour Tax consultants, we support here to UAE-based service providers.

• Evaluate the eligibility of businesses for zero-rating VAT of exported services in the UAE.
• Help to organise the invoicing and contracts to be compliant with FTA,
• We help to create FTA Audits and voluntary disclosures if required.
• Execute the VAT framework to mitigate the risk.

To learn more about VAT Case Study: Failure to Apply the Correct VAT Rate on Export of Services, 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.