How your place of residence affects your VAT treatment of services?
Under VAT, we have frequently encountered the terms ‘ Place of establishment’, ‘Fixed establishment’ and ‘Place of residence’. In various conditions, you will see these words used individually or in combination. Let us understand the distinction between each of these words.
Place of establishment under VAT in UAE
The Place of establishment is where a company is legally based in a country or where significant management decisions are taken and primary management functions are conducted.
For example, Azinova Technologies LLC is based in Dubai. The Dubai office is their Head Office, and the central management works from it. Hence, Azinova Technologies LLC’s Place of establishment is their Dubai office in UAE.
Fixed establishment in UAE
This is a fixed place of company, other than the Place of Establishment, where the individual conducts his business regularly, and adequate human and technology resources exist to enable the individual to supply or acquire goods or services.
For example, Azinova Technologies LLC opens offices in Abu Dhabi in UAE and Riyadh in Saudi Arabia. Both these offices are branches where electronic things are traded. Hence, Azinova Technologies LLC has fixed establishments in UAE and Saudi Arabia.
Hence, branches of industry are called fixed establishments, where they run business regularly and keep adequate human and technology resources to conduct business.
Place of residence in UAE
A place of residence is where an individual has a place of establishment or fixed establishment. Hence, a company’s Place of residence contains its Place of establishment and fixed establishments. For VAT registration, the supplies made in the Place of living should be estimated to check whether it surpasses the mandatory registration cusp.
For example: From the above criteria, it is clear that AzinovaTechnolgies LLC has a place of residence in UAE (due to its establishment in Dubai) and Saudi Arabia (due to its fixed establishment in Riyadh).
Hence, though the words ‘Place of establishment’, ‘Fixed establishment’ and ‘Place of residence’ are used interchangeably, these have distinct meanings. These are especially appropriate at the time of taking VAT registration.
What is the Place of supply of services?
The default rule for defining the Place of supply of services in VAT is that it will be the Place of residency of the supplier.
For instance, Bishop Design LLC, whose registered Place of business is in Abu Dhabi, supplies designing services to Rooh Fashions, an apparel manufacturer in Dubai.
Here, the Place of residency of the supplier is UAE; hence, the Place of service supply will be UAE and VAT @ 5% will be charged on the supply.
Note that where the supplier has numerous potential places of residence (e.g., the business is found in one country and has branches in other countries), the Place of residency will be the Place most near linked with the supply being made.
For instance: Where a UAE branch of a USA company offers services under the document signed by the UAE office, the supply will be closely linked with the UAE branch, and the Place of supply will be UAE.
Exceptions to the Default Rule
In the supply of a service case, there are specific exceptions to the default rule for defining the Place of supply. These are:
- Services supplied to an individual in another GCC VAT implementing Place, a registrant.
When services are supplied to someone in another GCC VAT-implementing place, a registrant, the Place of supply will be the recipient’s Place.
For example, Bishop Design LLC, whose registered Place company is in Abu Dhabi, supplies designing services to Salala Apparel, a registered clothing producer in Saudi Arabia.
Here, the receiver is a registrant in a GCC VAT implementing State. Hence, the supply place will be Saudi Arabia.
- Services received by a company resident in UAE from an individual resident outside UAE
When a business resident gets services in UAE from a resident outside UAE, the Place of supply will be UAE.
For example, Bishop Design LLC, whose registered Place of the company is in Abu Dhabi, gets accounting services from Ridhi Accountants, a resident in Australia.
Here, as the services are received from an individual resident outside UAE, the Place of supply of the service will be UAE. UAE VAT will be pertinent, which Bishop Design LLC has to pay on a reverse charge basis.