VAT Rules for Electronic Services in the UAE

VAT Rules for Electronic Services in the UAE

Place of Supply Rules for Electronic Services

The UAE VAT law uses the concept of ‘place of supply’ to determine whether a service will be subject to VAT within the UAE. For electronic services, specific rules are outlined under Article 31 of the VAT Decree Law, which state:

1. The place of supply will be:
   • Inside the UAE, if the services are used or enjoyed within the UAE.
   • Outside the UAE, if the services are used or enjoyed outside the UAE.
2. The actual use and enjoyment of electronic services is the primary factor in determining where VAT applies, irrespective of the contract location or payment origin.

This means VAT is applied based on where the services are consumed, not on where the agreement occurs or payment is received.

Zero-Rating the Export of Services

Previously, Article 31 of the Executive Regulations permitted zero-rating for certain ‘exported services’ when provided to non-resident customers, provided they did not relate to real estate or goods in the UAE, and the customer was outside the UAE when the services were performed.

The recent amendment to Article 31(1)(a)(3) of VAT Executive Regulations, effective from November 15, 2024, prohibits zero-rating for certain services, including electronic services, even when supplied to non-resident customers, if the services are used or enjoyed within the UAE. Specifically:

• The export of services will only be zero-rated if the services are used and enjoyed outside the UAE and not considered as being performed within the UAE or a Designated Zone.

Impact on Electronic Services

Electronic services are often global, with users spanning multiple jurisdictions. Under the new rules, electronic services provided by UAE businesses will be taxed based on where the service is consumed (actual use and enjoyment), not simply on the customer’s residency status.

Example:

If an electronic service, such as web hosting, software downloads, or AdWords campaign management, is used or enjoyed within the UAE, the service will be subject to 5% VAT, even if the customer is a non-resident.

 Documentation Requirement

For taxpayers making electronic supplies, if services are considered zero-rated or out of scope, it is essential to maintain documentation proving that these services are exclusively used and enjoyed outside the UAE. This may include records of client location, campaign targeting settings, or other evidence demonstrating that the services were intended solely for an audience outside the UAE. Proper documentation will help support your position in case of any future verification by the FTA.

Reasoning for the Change

The intent behind this amendment is to close gaps where services provided to non-residents could avoid taxation if consumed within the UAE. This adjustment is particularly relevant for electronic services, where global usage can complicate VAT application. By focusing on actual use and enjoyment, the UAE ensures that VAT applies whenever the service is ultimately consumed within the country.

Definition of Electronic Services: Article 23

“Electronic Services” refer to services automatically delivered over the internet or electronic networks. This includes:

1. Domain names, web-hosting, and remote maintenance of programs and equipment (e.g., purchasing hosting from platforms like GoDaddy or using AWS for remote IT support).
2. Supply and updating of software (e.g., subscribing to Microsoft 365 or Adobe Creative Cloud).
3. Supply of images, text, and information electronically, such as e-books or digital images (e.g., downloading e-books from Kindle or purchasing stock images from Shutterstock).
4. On-demand music, films, and games (e.g., streaming on Netflix or Spotify, or downloading games from Steam).
5. Online magazines (e.g., digital magazine subscriptions on Apple News+).
6. Advertising space on websites and rights associated with such advertising (e.g., purchasing ads on Google Ads or social media).
7. Broadcasting of political, cultural, sporting, or educational events (e.g., live streaming sports events on YouTube Live).
8. Live streaming via the internet (e.g., using Twitch for real-time content).
9. Distance learning services (e.g., online courses on Coursera or Khan Academy).
10. Any equivalent services with similar functions delivered electronically.

Electronic Marketplace

An “Electronic Marketplace” is defined as any distribution service operated electronically, such as through a website or digital platform, that enables suppliers to offer electronic services to customers. Examples include:

1. Platforms allowing suppliers to make electronic supplies to customers (e.g., Apple App Store or Google Play).
2. Transactions conducted entirely by electronic means (e.g., purchasing digital goods through Amazon or Shopify).

This definition ensures that digital platforms facilitating electronic services comply with VAT regulations, particularly under the new place of supply rules.

The recent updates to the UAE VAT Executive Regulations introduce tighter rules for electronic services, focusing on where the actual use and enjoyment of the service occurs. As a result, electronic services consumed within the UAE, regardless of the recipient’s residency, will generally attract 5% VAT