How UAE VAT law treats inter-branch support services, reverse charge mechanisms, and input tax recovery when a foreign head office operates through a UAE branch.
1. The Global Business Reality: One Entity, Many Locations
In an increasingly interconnected world, multinational organizations often operate through branch structures — where a head office (HO) abroad and a branch in the UAE function as one unified business.
Such branches frequently serve as representative or client relationship offices, supporting the head office in market research, customer engagement, and administrative coordination.
The head office, on the other hand, typically undertakes contractual and operational responsibilities — entering agreements, owning intellectual property, and bearing risk for services supplied to clients.
While this arrangement appears operationally straightforward, its VAT implications can be nuanced. Businesses often ask:
- ✓Should the branch charge VAT to its head office for internal services?
- ✓Does the head office need to register for VAT in the UAE?
- ✓Can the branch recover input VAT on expenses incurred locally?
Let’s unpack these questions through the lens of UAE VAT principles.
2. Understanding the Core Legal Concepts
A. What Constitutes a “Supply” under UAE VAT Law
| Concept | Explanation |
|---|---|
| Under Federal Decree-Law No. (8) of 2017, a “supply” generally means the provision of goods or services for consideration by a taxable person in the course of business. | However, a crucial requirement is that a supply must occur between two distinct persons. |
| Where a UAE branch and its foreign head office are part of the same legal entity, there is technically no supply between them. | In other words, a company cannot “sell” or “invoice” itself. |
| Therefore, inter-branch activities — such as internal administrative support, coordination, or reporting — are disregarded for VAT purposes. | This concept is sometimes summarized as the “same legal entity principle.” |
3. When Does the Head Office Become Liable for VAT?
Although internal transactions between the head office and branch are not treated as supplies, the head office may still have VAT obligations in the UAE if it provides services to local customers.
Under Article 30(2) of the VAT Decree-Law, if services are supplied by a non-resident entity to a recipient in the UAE, the place of supply is deemed to be within the UAE.
| Scenario | VAT Treatment |
|---|---|
| UAE customer is VAT registered | The customer applies the reverse charge mechanism (RCM) — accounting for VAT on behalf of the supplier and reclaiming it if eligible. |
| UAE customer is not VAT registered | The foreign supplier (head office) must register for VAT in the UAE and charge 5% VAT on its supplies. |
This ensures VAT neutrality for registered businesses while maintaining compliance for unregistered entities.
4. Can the UAE Branch Recover Input VAT?
A frequent concern for multinational groups is whether their UAE branch can recover input tax (e.g., VAT on rent, utilities, or office expenses) when its activities are primarily supportive in nature.
Under Article 54(1)(a) of the VAT Law, a business is entitled to recover input VAT to the extent that the expenses are used for making taxable supplies.
Even if the UAE branch does not make taxable supplies directly, the combined legal entity (head office + branch) is regarded as one taxpayer.
If the overall entity is making taxable supplies in the UAE — for instance, IT, consultancy, or service contracts billed to UAE clients — the branch is typically allowed to recover its proportionate input tax.
This principle ensures fairness and prevents VAT from becoming a cost burden on legitimate business operations.
5. Internal Transactions vs. Customer-Facing Supplies
| Type of Activity | VAT Treatment |
|---|---|
| Administrative or support work performed by the UAE branch for its foreign head office | Out of scope — no VAT as both are part of the same entity. |
| Services provided by the head office to UAE-based customers (e.g., IT, financial, or professional services) | Taxable — VAT applies in the UAE (via RCM if customer is registered). |
| Expenditures by the UAE branch that support taxable activities of the overall entity | Recoverable input VAT — subject to standard recovery rules. |
6. Key Compliance Takeaways
- 1Recognize the Legal Entity Unity
Branches and head offices are not separate VAT persons — internal cost sharing or service charges do not constitute supplies. - 2Determine the Place of Supply
When services are provided to UAE clients, evaluate whether the head office or branch is “most closely connected” to the supply to establish where VAT applies. - 3Monitor Reverse Charge Obligations
Ensure UAE customers correctly apply the reverse charge mechanism for cross-border services. If they are unregistered, the foreign entity must register for VAT. - 4Maintain Transparent Intra-Group Documentation
Even though internal transactions are out of scope, clear documentation (e.g., internal cost allocation, head office instructions) supports the VAT position during audits. - 5Optimize Input Tax Recovery
Branches should periodically review their input VAT claims, ensuring alignment with taxable activities and proportionate allocation of shared costs.
7. Conclusion: A Unified Entity, Not a Dual Taxpayer
In essence, UAE VAT treats a foreign head office and its UAE branch as two arms of the same organization rather than two separate businesses.
Internal support flows between them are outside the scope of VAT.
However, when the head office provides services to UAE customers, VAT obligations arise under the reverse charge mechanism or standard VAT registration rules.
Understanding this distinction — and aligning contracts, invoices, and internal accounting accordingly — ensures compliance, transparency, and tax efficiency across international operations.
