1.0 Introduction: The Principle of Zero-Rating for Exported Services
When a business in the United Arab Emirates (UAE) provides services to a customer located outside the country, these “exported services” can often be subject to a Value Added Tax (VAT) rate of 0%, a practice known as zero-rating. This principle is fundamental to international tax systems, as it ensures tax is generally levied where the service is consumed, not where it is supplied. For businesses and tax professionals, mastering these rules is critical. Incorrectly zero-rating a supply can lead to significant compliance risks and penalties, while failing to apply the zero rate when it is due means unnecessarily charging VAT, potentially losing a competitive edge. This guide breaks down the specific conditions that must be met to zero-rate an exported service, using practical case studies to make these complex rules accessible for learners of international tax.
This transition is underpinned by a clear legal framework established by Federal Decree-Law No. 16 of 2024 and Federal Decree-Law No. 17 of 2024, alongside Ministerial Decisions No. 243 and 244 of 2025. Together, these regulations provide a comprehensive roadmap, defining the scope, implementation timeline, and compliance obligations for businesses. Understanding this framework is the essential first step for any organisation to ensure compliance and successfully leverage the benefits of this new digital system.
2.0 Understanding the Core Conditions for Zero-Rating
Before diving into specific scenarios, it’s essential to have a solid grasp of the foundational rules. The ability to zero-rate a service hinges on satisfying two distinct tests concerning the customer’s residency and physical location.
2.1 Condition 1: The Recipient Must Not Have a Place of Residence in the UAE
The first condition states that the service recipient must not have a “Place of Residence in an Implementing State.” While the regulation refers to a ‘Place of Residence in an Implementing State,’ it is critical to understand that for current VAT purposes, the UAE does not recognise any other country as an ‘Implementing State.’ Therefore, this condition is satisfied if the recipient does not have a place of residence in the UAE.
A “place of residence” can be one of two types:
| Term | Definition |
| Place of Establishment | The place where the recipient is legally established, where significant management decisions are taken, and central management functions are conducted. |
| Fixed Establishment | Any fixed place of business (e.g., a branch) with sufficient human and technology resources to supply or acquire services. |
When a recipient has establishments both inside and outside the UAE (e.g., a head office abroad and a branch in the UAE), the supplier must apply the “most closely related” principle. This means determining which of the recipient’s establishments is the true beneficiary and contractual partner for the service. To make this determination, a supplier should consider several factors:
- Contractual Recipient: Who is named in the contract?
- Actual Beneficiary: Which establishment truly benefits from the service?
- Payment and Invoicing: Which establishment receives the invoice and pays for the supply?
- Instruction Source: Which establishment is giving instructions to the supplier?
- Business Operations: Are the services related to business conducted by a specific establishment?
If the UAE-based establishment is the one most closely related to the service, this condition is not met, and the service cannot be zero-rated.
2.2 Condition 2: The Recipient Must Be Physically Outside the UAE
The second condition requires the recipient to be physically located outside the UAE at the time the services are performed. However, the application of this rule differs fundamentally between natural persons and corporate entities.
For a natural person, the test is definitive: if an individual is physically inside the UAE when the service is performed, they cannot be considered “outside the State.”
For a corporate entity (which can be present in multiple locations simultaneously), the analysis is more complex. The supplier must apply the “most closely related” principle a second time. A supplier should only consider the physical presence of the establishment that is the true recipient of the supply. Therefore, if a service is most closely related to a recipient’s foreign head office, the recipient is considered “outside the UAE” for this condition, even if they also have a branch with staff physically present in the UAE. The presence of the UAE branch is disregarded if it is not the establishment receiving the service.
2.3 The Critical Exception: The “Short-Term Presence” Rule
A special extension, found in Article 31(2) of the Executive Regulation, provides a crucial exception to the physical presence rule. A recipient can still be considered “outside the State,” even if they are physically present in the UAE, but only if two specific requirements are met simultaneously:
- Short-Term Presence: The presence in the UAE must be for less than one month.
- Not Effectively Connected: The presence must not be effectively connected with the service being supplied.
To master the application of this legal framework, we will now analyse four distinct scenarios, each designed to test a specific aspect of these rules.
3.0 Applying the Rules: Case Study Walkthroughs
3.1 Case Study 1: The Arbitration Hearing
Situation
A law firm in the UAE is providing legal services to a non-resident company regarding an arbitration case. The client company sends a representative to the UAE to be physically present during the arbitration hearing.
Analysis
In this case, Condition 1 is likely met, as the client’s place of residence is outside the UAE. However, Condition 2 (physical location) is not met during the hearing. The representative’s presence in the UAE is directly and “effectively connected” to the legal services, since the non-resident client, through its representative, was physically present in the UAE at the time the services were performed by the law firm. Because the presence is connected to the supply, the “short-term presence” exception does not apply, regardless of how long the representative stays.
Conclusion: The Strategic Imperative for Early Preparation
The UAE law firm cannot zero-rate the services it supplies during the period the client’s representative is present in the UAE for the arbitration.
3.2 Case Study 2: The UK Company with an Unrelated Conference
Situation
A UK-resident company hires a UAE law firm for ongoing litigation services. During the litigation period, an employee of the UK company visits the UAE for a week to attend a conference that is completely unrelated to the legal case.
Analysis
Here, we must apply the “short-term presence” exception.
- Is the presence short-term? Yes, one week is less than a month.
- Is the presence effectively connected? No, attending an unrelated conference has no connection to the litigation services being provided by the law firm.
Since both requirements of the exception are met, the employee’s physical presence in the UAE does not disqualify the service from being zero-rated.
Conclusion
The UAE law firm can continue to zero-rate its supply of legal services because the recipient’s short-term, unconnected presence meets the conditions of the exception.
3.3 Case Study 3: The US Company with an Unrelated Branch Training
Situation
A UAE-based investment fund provides fund management services to a company’s head office in the United States. The US company sends a staff member to the UAE for three weeks to train employees at its local UAE branch. The services of the UAE branch are entirely separate from the fund management services provided to the US head office.
Analysis
This analysis assumes the fund management services are contractually supplied to, and most closely related to, the US head office, not the UAE branch. We then test the US staff member’s presence against the “short-term presence” exception.
- Is the presence short-term? Yes, three weeks is less than a month
- Is the presence effectively connected? No, the purpose of the visit is to train staff at the UAE branch, which is not related to the fund management services being supplied to the US head office.
Both conditions for the exception are satisfied.
Conclusion
The UAE investment fund can zero-rate its services because the recipient’s presence in the UAE qualifies for the exception.
3.4 Case Study 4: The Canadian Investor on Holiday
Situation
A Canadian resident, acting as a private individual, hires a UAE company to perform due diligence on a potential investment. During the due diligence process, the Canadian individual visits the UAE for a one-week holiday and has no contact with the UAE company.
Analysis
This is a clear application of the “short-term presence” exception for a natural person.
- Is the presence short-term? Yes, one week is less than a month
- Is the presence effectively connected? No, a personal holiday is entirely unconnected to the business due diligence services being performed
Conclusion
The UAE company can zero-rate its due diligence services.
These cases illustrate that applying the rules requires a careful, step-by-step analysis of the facts. This process can be simplified into a practical framework.
4.0 A Practical Decision-Making Framework
To operationalize this analysis, suppliers should use the following step-by-step diagnostic checklist to determine the correct VAT treatment for an exported service.
- Assess Place of Residence (Condition 1):
- Does the recipient have a place of establishment or a fixed establishment in the UAE?
- If yes, is that UAE establishment the one “most closely related” to your service?
- If the answer is yes, the service cannot be zero-rated. If no, proceed to the next step.
- Assess Physical Location (Condition 2):
- Will the recipient be physically present in the UAE at the time the services are performed? (Note: For corporate entities, this refers only to the presence of the establishment most closely related to the supply).
- If no, the service can be zero-rated (provided Condition 1 is met). If yes, proceed to the final step.
- Apply the Short-Term Presence Exception:
- Is the recipient’s presence in the UAE for less than one month?
- Is the presence NOT effectively connected with the supply of your service?
- If the answer to both questions is yes, the service can be zero-rated. If the answer to either question is no, the service cannot be zero-rated for the duration of the presence.
5.0 Key Learning Takeaways
This analysis of the rules and case studies reveals several critical insights for anyone seeking to understand the zero-rating of exported services.
- The “Most Closely Related” Test is Crucial: The mere existence of a recipient’s branch in the UAE does not automatically prevent a service from being zero-rated. The key is to identify which establishment—the foreign head office or the local branch—is the true recipient of the service.
- Physical Presence is Key, But Has an Exception: The default rule is that physical presence in the UAE prevents zero-rating. However, the short-term presence exception is a critical nuance that allows for zero-rating in specific, limited circumstances.
- The Exception Has Two Parts: For the exception to apply, the recipient’s presence must be both short-term (less than a month) and not effectively connected to the service. Failing to meet even one of these two conditions means the exception cannot be used.
- Supplier’s Responsibility: Ultimately, the responsibility falls on the UAE supplier to ascertain all the necessary facts. If a supplier cannot confirm that the conditions for zero-rating are fully met, they must apply the standard rate of VAT to the supply.
Partner with Imperium ATC for VAT Confidence
Navigating the complexities of zero-rating exported services under UAE VAT law requires precision, expertise, and a clear framework. As demonstrated in these case studies, even small details—such as a client’s short-term presence in the UAE or the “most closely related” establishment test—can determine whether a service qualifies for zero-rating or not.
At Imperium, we specialise in guiding businesses through these challenges:
- Expert VAT Analysis – We apply the “most closely related” test and short-term presence rules to ensure your supplies are treated correctly.
- Compliance Assurance – Avoid penalties and unnecessary VAT charges by letting us validate your transactions before invoicing.
- Tailored Advisory – Whether you’re a law firm, investment fund, or consultancy, we adapt the rules to your industry and client scenarios.
- Practical Frameworks – We provide step-by-step checklists and decision-making tools, so your team can apply the rules confidently.
Don’t leave VAT compliance to chance. Partner with us to safeguard your business, strengthen client trust, and gain a competitive edge in the UAE market.
Contact us today to schedule a consultation and ensure your exported services are structured for zero-rating success.