Zero Rating Exported Services: When Your Dubai IT Agency Charges 0% VAT

The Short Answer

A service supplied by a UAE business to a customer outside the UAE can be zero rated, meaning you charge 0% VAT instead of 5%, provided the conditions in the VAT law are met. Zero rated is not the same as exempt or out of scope: you still register, still invoice, still file, and you can still reclaim the VAT on your own costs. The two things that decide it are where your customer actually belongs and where the service is really consumed. Get the evidence wrong and the FTA can treat the supply as standard rated, which means paying the 5% you never charged out of your own margin.

The Conditions That Have To Be Met

For an export of services to be zero rated, broadly:

• The recipient does not have a place of residence in the UAE, and
• The recipient is outside the UAE at the time the service is performed, and
• The service is not directly connected with land or goods situated in the UAE.

For a software development, design or consulting agency billing a company in London or New York, this is usually satisfied. The complications come from the details below.

Where This Goes Wrong for IT Agencies

The client has a UAE branch or presence. If your customer has an establishment in the UAE and the service relates to that establishment, zero rating does not apply, even if you invoice the overseas head office. Whose problem the service actually solves matters more than which address is on the invoice.

The service benefits someone inside the UAE. If an overseas client pays you to build or support something used by their UAE staff or UAE customers, the FTA can treat it as consumed here.

Software licences and digital products behave differently from services. Selling access to software is not automatically the same as performing a service, and electronic services have their own place of supply rules. If you sell subscriptions rather than time, get this looked at specifically rather than assuming your consulting treatment carries over.

The client is an individual, not a business. Selling to consumers abroad raises different questions from selling to businesses, and it can also raise obligations in their country rather than yours.

The Evidence You Need To Keep

Zero rating is a claim you have to be able to support. In practice:

1. A contract or engagement letter showing who the customer is and where they are.
2. Proof of the customer's overseas status, such as their registered address, company registration details, or a trade licence from their own jurisdiction.
3. Invoices showing 0% VAT and stating the reason, not a blank VAT line.
4. Evidence of where the work was delivered, which for a software project means the correspondence and deliverables trail you already have.
5. Payment records tying the receipt to that customer.

Keep it for five years. The time to assemble this is when you raise the invoice, not when a VAT audit asks.

Charging 5% When You Did Not Have To

This is the more common error, and it costs you clients rather than penalties.

An agency that charges 5% on an export it could have zero rated is 5% more expensive than a competitor who got it right, and the overseas client cannot reclaim UAE VAT. You have simply raised your price. Worse, once collected, that VAT belongs to the FTA and you have to pay it over.

If you have been charging 5% on genuinely exported services, do not just switch. Work out the position, correct it properly, and if returns need amending, use the voluntary disclosure route rather than quietly changing your invoices. (See voluntary disclosure and how to correct a VAT return.)

You Still Register, and You Still Reclaim

Two points founders often miss.

Zero rated supplies count towards your VAT registration threshold. An agency billing entirely to overseas clients can pass AED 375,000 of taxable supplies and be required to register while never charging a dirham of VAT.

And once registered, you can reclaim input VAT on your business costs: cloud hosting, software, rent, professional fees. For an agency whose sales are all zero rated, this usually means a repayment position rather than a payment one, which is worth having.

How Khizr UAE Helps

We handle VAT registration, quarterly returns and the zero rating evidence for software and IT services agencies in Dubai, including working out which of your contracts genuinely qualify. See our VAT registration and filing service, or read common VAT mistakes UAE tech companies make.

WhatsApp: +971 50 428 3999

Email: info@khizruae.com