The UAE has always been a hub for international business, with many foreign companies seeking to establish a presence. Most companies appoint local agencies or distributors as representatives.
These agents play a vital role in helping foreign companies establish a foothold in the Gulf region and connect with potential customers. Commission and consignment agencies are the most common types of arrangements in the UAE.
Besides earning a commission, certain agencies also receive reimbursements for business or store-related costs, marketing contributions, and capital contributions to open or renovate a store. From a VAT standpoint, most companies treat commission income received from foreign principals as ‘export supply’, subject to zero-rated VAT.
However, this treatment may change due to a recent amendment to the VAT Law. As a result, commission income from foreign principals could be subject to 5 per cent VAT.
Under the old rules, services to a foreign principal who did not have a place of residence in the UAE qualified for zero-rated export supply subject to fulfilment of certain other conditions. Since most foreign principals do not have a fixed establishment in the UAE, commission income qualified for zero-rated export supply.
Under the new rules, the place of residence of the agent is deemed to be the place of residence for the principal in cases where the agent regularly exercises the right of negotiation and enters into agreements in favour of the principal. Or if the agent maintains a stock of goods to fulfill supply agreements for the principal regularly.
This means that if the agent is a UAE resident and acts or stores goods on behalf of the foreign principal, it is assumed that the place of residence of the foreign principal is that of the agent in the UAE.
With the place of residence of the foreign principal deemed as the UAE, commission income received from foreign principals, in such cases, may not qualify for zero-rated exports. This may also trigger the need for a foreign supplier to register under VAT.
Implications in UAE CT too
The recent VAT amendment is not an isolated change, the UAE Corporate Tax has introduced a concept of a permanent establishment (PE) for companies operating in the region. The PE concept is similar to the VAT amendment and focuses on foreign companies operating in the UAE through local agents or distributors.
The PE concept seeks to ensure that companies with a significant economic presence in the UAE are subject to tax, similar to the VAT amendment that aims to tax foreign principals who operate in the region through local agencies but do not have a place of residence in the UAE.
In conclusion, the change has been introduced to align the UAE with other tax jurisdictions that levy taxes on similar agency arrangements. Businesses must review their agency agreements with foreign principals for the potential impact of this amendment.
The tax treatment will not only affect the commission income but also the reimbursement of other costs from foreign principals. It is important for businesses operating in the UAE to be aware of these changes and ensure that they comply with the new tax regulations to avoid potential penalties.