VAT q&a: 'What are the rules when dealing with an overseas supplier?'

The UAE broker earns commission by taking orders from GCC customers, but does not provide services or take payments directly

The overseas supplier has an establishment in the UAE, but the broker does not transact with that entity. Photo: Getty Images

My business acts as a broker for an overseas supplier and earns commission for doing this. We take orders from GCC customers and forward these to the supplier, who then ship the goods directly to the customer. The customer pays the supplier directly and we are then paid commission. The overseas supplier has a place of residence (establishment) in the UAE but our company does not transact with its UAE entity. Based on the above, will our commission be zero or standard-rated for VAT? AB Dubai

The answer to your query is complex and technical and will depend on several factors set out in the Decree Law and Executive Regulations. Therefore, to help answer this question comprehensively I took advice myself from Mayank Sawhney, a tax advisory partner with Crowe in Dubai.

We understand from the facts of the query that the contract for provision of these services in exchange for commission is between this broker in the UAE and the overseas supplier. It seems the customers have neither contracted with the broker for the provision of any services, nor have any form of services been provided to them. Finally, no form of payment has been made by the customers to the broker agent.

If there was a contract between the customer and the UAE broker, or any services are provided to them by the broker or any payment is received by the broker from the customers, then the commission would be vatable at the standard rate of 5 per cent.

If the contract, provision of services and payment are only between the UAE broker and supplier, we then have to determine the place of establishment/residence of the supplier. This determines whether the commission should be standard-rated or zero-rated.

If this supplier is resident in an overseas jurisdiction outside the UAE, without having any branch or representative office in the country, then it will be considered as "export of" and hence the commission income would be zero-rated. However, you mention that the overseas supplier has an entity in the UAE and the legal form of that entity will determine the VAT treatment of the commission income. Mr Mayank has advised on the two possibilities.

If the overseas supplier has a branch or representative office in the UAE, it will still be considered that the brokerage services have been provided and received by this supplier in the UAE. This is because an overseas head office and its branch/representative office in the UAE are legally considered as one entity and cannot be separated. In this case, the brokerage services will be standard-rated at 5 per cent VAT. Having a branch or representative office means the overseas supplier is considered to have a permanent establishment/fixed establishment/place of residence in the UAE.

Alternatively, if the overseas supplier only has a separately incorporated subsidiary or stand-alone company in the UAE with the same trade name, then it will not be considered that the supplier has a permanent establishment/fixed establishment/place of residence in the country. In this case, the brokerage services would be zero-rated.

One final condition for these transactions being zero-rated is that the services are not directly or indirectly received by any director or employee of the separately incorporated subsidiary or stand-alone company in the UAE, or any third person on their behalf.

I voluntarily tried to register my company for VAT but got rejected because the minimum threshold had not been reached. Should I apply again now as I have passed the threshold? Also do I need to start a new registration? AW Abu Dhabi

VAT registration thresholds are based on the past 12 months of taxable turnover. If you have reached that, you should re-register immediately. You need to start a brand new registration and use a different email address as those previously used in a rejected registration cannot be reused on the FTA portal.

Lisa Martin, a chartered accountant with more than 20 years of commercial finance experience, is the founder of accounting, auditing and VAT consultancy, The Counting House. Email any VAT queries to [e-mail]