Import of Service: What are the VAT compliance requirements for Services imported by a Free Zone company?
UAE free zone companies, such as those based in Dubai Multi Commodities Centre (DMCC), Jebel Ali Free Zone (JAFZA), and Abu Dhabi Global Market (ADGM), often source services from international suppliers to enhance their business operations and stay competitive in the global market. By outsourcing to global service providers, these companies gain access to specialized expertise, advanced technologies, and cost-effective solutions. This strategic approach supports growth, efficiency, and innovation within the dynamic UAE free zone business environment.
Such imported services, although the services are provided by an overseas supplier and received within a free zone, are still subject to UAE VAT under the Reverse Charge Mechanism (RCM).
What is Reverse Charge Mechanism (RCM)?
According to Article 48 (1) of the Federal Decree-Law No. 8 of 2017, where a non-resident supplier makes a taxable supply to a taxable person in the UAE, the recipient shall be deemed to have made the supply to himself and shall be liable to account for VAT under the reverse charge mechanism.
Under the UAE VAT Reverse Charge Mechanism (RCM), free zone companies and other UAE-based businesses that import services from overseas suppliers are required to account for VAT themselves. When importing services, the UAE recipient must calculate VAT, typically at the standard 5% rate, on the value of those services and report it in their VAT return. Suppose the imported services are used for taxable business purposes. In that case, the company can usually recover the input VAT in the same return, resulting in no actual cash outflow, assuming full input VAT recovery is allowed.
Example:
ABC FZCO, located in JAFZA (designated freezone), receives consultancy services valued at AED 100,000 from Germany (non-UAE supplier). The JAFZA company must apply the Reverse Charge Mechanism (RCM) and account for VAT of AED 5,000 (5% of AED 100,000).
How to report import of service in the VAT return?
When the service is imported from outside the UAE, the supply value will be considered taxable in the UAE, and a standard rate (5%) VAT must be applied to the supply value to determine the VAT amount. This is the VAT you will "self-account" for under the reverse charge mechanism.
The importer must account for this supply and the VAT under RCM in the accounting books and declare the supplies subject to RCM in the VAT Return Form 201. The following are the relevant boxes in Form VAT 201 that should be considered when reporting the import of a service in the VAT return.
- Box 3 – Supplies subject to Reverse Charge Mechanism:
- Value of the imported service and VAT amount calculated at 5% should be reported in this column.
After reporting the VAT amount in Box 3, the taxpayer can recover the Input VAT of those services imported if the taxpayer is eligible for input VAT recovery. The important rule to determine the input VAT recovery is that the taxpayer has used the goods or services for making taxable supplies (i.e., subject to 5% VAT or 0% VAT).
- If the imported services are used for taxable business activities, the taxpayer can recover input VAT in the same return.
- Report this in Box 10 – Recoverable VAT.
Example:
In the earlier example, ABC FZCO (JAFZA company) is assumed as eligible to recover input VAT. Then the input VAT AED 5,000 can be claimed in Box 10 as recoverable input tax, resulting in no net VAT payable for the transaction.
What is the VAT Return Compliance to be followed by the Free Zone Company on import of service?
To ensure proper recording of the import transaction in the VAT return and to avoid penalties, the following compliance steps must be taken:
- Maintain proper documentation and account the transaction
Where a Taxable Person accounts for Due Tax in accordance with Clause 1 of Article 48 of the UAE VAT Decree-Law, they are required to retain specific documentation related to the supply. These include the supplier’s invoice along with a service contract.
It is important to disclose the VAT on imported services accurately and within the correct VAT return period. The self-assessed VAT amount should be reported in Box 3 of the VAT return, and the recoverable input VAT, if eligible, should be claimed in Box 10. Additionally, the correct VAT rate must be applied to the value of the imported services to ensure compliance with UAE VAT regulations and avoid potential penalties.
Input VAT on imported services is recoverable only when the services are used to make taxable supplies. If the imported services relate to exempt supplies, the associated portion of VAT input is non-recoverable and should not be claimed in the VAT return.
Although Jebel Ali Free Zone (JAFZA) and other designated UAE free zones benefit from various tax relaxations under UAE VAT legislation, VAT on imported services remains applicable under the Reverse Charge Mechanism (RCM). It is crucial for free zone companies to fully understand their VAT obligations in the UAE, accurately report imported services in their VAT returns, and maintain strict compliance to avoid penalties or audit risks.
By understanding the distinct VAT treatment of goods and services in UAE-designated free zones, businesses can effectively manage their VAT compliance obligations and optimize their tax strategies in accordance with UAE VAT laws. Ensuring full compliance is crucial to avoid penalties and audit issues, making it essential for companies to seek guidance from experienced tax agents or VAT consultants to navigate complex regulations confidently.
How CLA Emirates Can Help
At CLA Emirates, we specialize in helping UAE free zone companies stay VAT compliant—especially with the complexities of the Reverse Charge Mechanism. From accurate VAT return filing to ensuring proper documentation and recoverable input VAT, our expert team offers tailored guidance and hands-on support. Whether you're in JAFZA, DMCC, or ADGM, we help you manage VAT on imported services confidently and avoid costly penalties.
Let us simplify your VAT compliance—so you can focus on growing your business.
Ajil Varghese
Associate Director – Taxation
Ajil Varghese
Associate Director – Taxation
M: +971 54 2119 621
E: Ajil.Varghese@claemirates.com
CLA Emirates
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