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Local supply of electronics, electric devices are subject to reverse charge mechanism

Buyer in designated zone can export the goods to its overseas customer by raising a tax invoice without effectively charging VAT as the goods are subsequently located in the designated zone to be exported

Khaleej Times' has launched a new initiative to offer readers expert insights about the impact of VAT and Corporate Tax on UAE’s business environment. Here is another expert view:

We are company located in a designated free zone of Dubai. Our activities are trading of electronics and electric devices. We sometimes buy products from a UAE mainland seller and then export overseas. Some of these sellers have warehouse in the same designated zone (from which the goods are shipped directly to our overseas customers) while others have cleared customs and stored the goods in the UAE mainland. Kindly guide us on how we should treat VAT on each of these scenarios.

We assume that the suppliers and the entity are registered with FTA under VAT law. As per the cabinet decision no. 91 of 2023 the local supply of electronics and electric devices shall be subject to reverse charge mechanism (RCM). Hence, when the goods are supplied from mainland, the supplier will ask the entity to declare if goods will be consumed or are they for resale. If entity declares it for resale or to be used in manufacturing process, then the supplier will not be required to charge VAT in its invoice and entity will be required to record VAT liability under RCM.

Under VAT, designated zones are considered out of UAE, and hence, when the supplier sells goods which are located in designated zones at the time sale such will be considered as out of scope for VAT purpose and hence, no VAT is required to be charged by the supplier.

Under both the scenarios, buyer (in designated zone) can export the goods to its overseas customer by raising a tax invoice without effectively charging VAT as the goods are subsequently located in the designated zone to be exported.

Our question is related to corporate tax. We are a company located in a designated zone in Sharjah. We have terminals where our customers provide us the goods (oil products) to store for a period of time based on the contract between us and the customer. We are mere custodian of these goods and release the goods as per the request of the customer. Kindly let us know your view on how our company shall be treated for UAE corporate tax.

We assume that the entity is a qualified free zone person (QFZP) and terminals are located in the free zone, from the above statement it appears that entity is engaged in logistic or warehousing services. Such activities are qualifying activities as defined under Article 2(3)(m) of Ministerial Decision no. 265 of 2023. Hence, such QFZP can opt for zero per cent tax regime under the corporate tax if it complies with other requirements.

Entity needs to ensure that terminals must not be given on lease or entity’s contract with counter part must not express that terminal itself is leased. Because leases or rental income from commercial properties may have different tax treatment. Lease or rental income from commercial properties located in free zone received from the customer being free zone person only are qualifying income but if its customer is not a free zone person then that rental income will be non-qualifying. One should also consider licensing activities and VAT treatment being followed by the entity for classifying the services rightly. Entity needs to ensure that both the actual activities and its documents with the customers reflect and show logistics/warehousing activities.

About the expert:

Atik Munshi is a thinker, leader and author of several books and acted has board member in some reputed UAE companies. He has over 30 years working experience in various senior positions and currently serves as the managing partner for FinExpertiza UAE which is the global top 30 accounting network.

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