Note on Application of article 31 Zero –rating Export of Services for purpose of Subletting the vessel

Application of article 31 "Zero-rating the Export of Services" to the provision of services for the operation of ships outside the UAE. Namely, will the activity of subletting the vessel be classified as export of services and the VAT rate of 0% will be applied in the following case:

  1. A company, registered in the territory of the free economic zone of Hamria, leased vessels from companies registered outside the UAE, subleases them to companies registered in the main territory of the UAE (local companies), as well as in the territories of free economic zones. The vessels are operated in the waters of foreign countries and do not enter the waters of the UAE.

Applicability of Article 31 Zero Rating the Export of Services-

In the situation given, the transaction of subletting vessel will not be covered under this article as according to clause 1(a) (1) of this article the recipient of services should not have a place of residence in UAE or any other implementing state but vessel is sub leased to a company registered either in UAE mainland or Designated zone.

Rank Opinion-

When a company ‘X’ registered in designated zone leased a vessel from a company registered outside UAE, the transaction will be out of scope of UAE VAT.

  1. When Company X sublet the vessel to company registered in mainland or to a company registered in territory of designated free zones, the transaction will be treated under normal VAT rules as the place of supply of services will be UAE, overriding the normal place of supply rules, Hence such supplies are then taxed if taxable under normal VAT rules.
  2. A company, registered in the local territory of the UAE, leased vessels from companies registered outside the UAE, subleases them to companies registered in the main territory of the UAE (local companies), as well as in the territories of free economic zones. The vessels are operated in the waters of foreign countries and do not enter the waters of the UAE

Rank Opinion-

When a company ‘Y’ registered in UAE Mainland leased a vessel from a company registered outside UAE, will be treated as import of services. (As per definition of import to be read with article 48(1) of Federal Decree-Law No. 8) When company ‘y’ Sub lease the vessel to company registered in mainland or in designated zone the transaction will be covered under normal supply of services rules.

Explanation with help of an example

Suppose company Z is registered outside UAE-

Supply of vessel from ‘Z’ to ‘X’- Outside the Scope of UAE VAT for company ‘X’

Supply of vessel from ‘Z’ to ‘Y’- To be treated as Import of services for company ‘Y’

Sub-Leasing vessel by-

‘X’ to Company Registered in UAE Mainland- Taxable if stipulated by law

‘X’ to company Registered in Designated zones- To be treated as if supply is made with UAE mainland and taxable if stipulated by Law.

‘Y’ to Company Registered in UAE Mainland- Taxable if Stipulated by Law

‘Y’ to company Registered in Designated zones- Taxable if Stipulated by Law

Article 34(2) of VAT rules cabinet decision no. 52

The supply of means of transport shall be subject to the zero rate if It is a supply of a ship, boat or floating structure that is designed or adapted for use for commercial purposes and which is not designed or adapted for recreation, pleasure or sports

Conclusion-The Activity of sub-leasing the vessel either in main land or in designated zone by a company registered either in mainland or in designated zone due to applicability of article 34(2) of VAT rules cabinet decision no 52 and not because of applicability of article 31 of the same as recipient of the services are registered within UAE.

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