Navigating the fine line between domestic supplies and zero-rated exports

International trade today rarely happens in a straight line. In many cases, goods are purchased from one supplier, stored or shipped through another location, and finally delivered to a customer in a third country.
When such three-party or chain export transactions occur within the UAE, businesses often face one big question — who can apply the zero-rate of VAT on export, and who must charge 5%?

This blog simplifies the issue and highlights how businesses can structure transactions to remain compliant while optimizing input tax recovery.

1. What Is a Three-Party Export?

A three-party export transaction arises when there are three different parties involved in the movement of goods:

1. A UAE supplier, who physically holds or manufactures the goods.
2. A UAE trader or intermediary, who purchases the goods for resale to an overseas customer.
3. A foreign customer, located outside the UAE or GCC Implementing States, who ultimately receives the goods.

Typically, the goods move directly from the UAE supplier’s premises to the foreign customer’s port of destination — but the contractual flow of invoices involves both the supplier and the intermediary.

2. The VAT Challenge

While the movement of goods looks like a single export, VAT law treats each link in the chain separately.
This means there are two distinct supplies taking place:

• Supply 1: UAE Supplier → UAE Trader
• Supply 2: UAE Trader → Overseas Customer

The challenge lies in determining which supply can qualify as a zero-rated export under Article 45 of the VAT Law — and which one must be treated as a domestic supply subject to 5% VAT.

3. How the Law Applies

(a) Supply Between Two UAE Entities

Where both supplier and buyer are UAE-registered, the first supply is treated as a local transaction. Even if the goods are shipped directly to a foreign destination, the UAE supplier’s contractual customer is another UAE-based taxable person.

Therefore, unless the supplier itself is the “exporter of record” and meets all export documentation requirements, the first supply will generally attract 5% VAT.

(b) Supply to the Overseas Customer

The second supply — from the UAE trader to the foreign buyer — can qualify for zero-rating under Article 45(1) of the VAT Law if the following conditions are met:

1. The goods are physically exported outside the UAE within 90 days from the date of supply.
2. The exporter retains commercial and official evidence (such as the export declaration, bill of lading, and airway bill).
3. The exporter issues a valid tax invoice in compliance with Article 59 of the Executive Regulation.

If these conditions are satisfied, the UAE trader can issue a zero-rated invoice to the foreign customer.

4. Input Tax Recovery

Even though the UAE supplier charges 5% VAT on its invoice, the intermediary (UAE trader) can usually recover this VAT as input tax under Article 54(1), provided that:

• It is registered for VAT in the UAE.
• The goods are used to make taxable or zero-rated supplies (in this case, exports).
• The trader holds a valid tax invoice and appropriate proof of payment.

This ensures that VAT does not become a cost in the supply chain — it is merely passed through and later recovered through the VAT return process.

5. Documentation and Compliance Essentials

To defend the zero-rating position during an FTA review or audit, the intermediary must maintain clear and synchronized documentation across all parties.
Key records include:

• Export declaration showing goods cleared for export.
• Bill of lading / airway bill with the intermediary named as the shipper or consignor.
• Commercial invoice and purchase order trail showing the link between the UAE supplier, intermediary, and overseas buyer.
• Proof of receipt or import customs documentation from the destination country.

Consistency across documents — especially in naming the exporter, consignee, and shipping terms — is critical for compliance.

6. Practical Takeaways for Businesses 

• Clarify the exporter role early in the contract — whether the supplier or the intermediary will handle the customs export process.
• Do not assume that goods shipped abroad automatically qualify for zero-rating. Review who the contractual buyer is.
• Retain export documentation within 90 days of supply to safeguard the zero-rating position.
• Recover input VAT only with a valid tax invoice and proof that the purchase relates to taxable supplies.
• Align trade and finance teams — logistics, procurement, and accounts must use consistent names and terms across all export documents.

Conclusion

Three-party exports are common in modern supply chains, especially in free zones and trading hubs like the UAE.
However, the VAT treatment depends on contractual flow, exporter status, and evidence of export — not just on where the goods are physically shipped.

By aligning contracts, documentation, and internal processes, businesses can ensure that zero-rating benefits are claimed correctly and that VAT remains a pass-through tax, not a business cost.