Stop Double-Taxing Your Own Business

How to Navigate Out-of-Scope Transactions While Securing Input Tax and Audit Protection

What This Blog Unpacks:

The “One Entity, No Supply” Rule
FTA’s Silent Approval
Input VAT: Yours to Claim
Nailing the Place of Supply;
Avoiding the Pitfalls
Action Plan for Tax Teams

VAT Treatment of Services Between a UAE Branch and Its Foreign Head Office

In an increasingly global business environment, many multinational corporations operate in the UAE through branches rather than subsidiaries. A common structuring query under Federal Decree-Law No. 18 of 2022 on Value Added Tax (“UAE VAT Law”) is whether services provided by a UAE branch to its foreign head office (or vice versa) constitute a taxable supply for VAT purposes.

The answer has significant implications for:

VAT compliance and reporting,
Input tax recovery strategies,
Contract structuring, and
Tax risk management during FTA audits.

This post dissects the statutory framework, interpretive positions of the FTA, international VAT jurisprudence, and practical application, providing a reference point for CFOs, Tax Directors, and in-house VAT teams.

1. Legal Framework: Supply and Person under UAE VAT

Under Article 1 of the UAE VAT Law, a “taxable supply” is defined as a supply of goods or services for consideration by a person conducting business in the UAE.

Key concepts:

“Supply” requires the provision of goods or services to another person.
“Person” includes natural persons, legal persons, and unincorporated entities capable of carrying out economic activities.

However, for VAT purposes, a branch does not have a separate legal personality distinct from its head office. It is regarded as part of the same legal person, a position aligned with OECD VAT Guidelines and interpretations in jurisdictions such as the UK, Singapore, and the EU.

2. Transactions Between a Branch and Head Office: Is There a Supply?

The core principle is:

A person cannot make a supply to itself under VAT law.

Accordingly, transactions between a UAE branch and its foreign head office:

Do not constitute a supply for VAT purposes,
Are out of scope of UAE VAT, and
Do not trigger output VAT obligations.

This view is aligned with the position taken by the UAE Federal Tax Authority (FTA), where the FTA confirmed that transactions between a head office and its branch do not constitute supplies, as they are not “between two separate persons.”

3. Input VAT Recovery on Branch Costs

While intra-entity transactions are disregarded for VAT, input VAT recovery by the UAE branch remains permissible under Article 54 of the UAE VAT Law, subject to:

The general input tax recovery conditions,
The extent to which costs are incurred for making taxable or deemed taxable supplies.

If the foreign head office (same legal person) makes supplies in the UAE to VAT-registered customers under the reverse charge mechanism or under taxable supply obligations, the UAE branch’s input VAT incurred on related support services may still be recoverable, provided appropriate documentation and linkage can be demonstrated.

4. Place of Supply and Establishment Tests

While intra-entity transactions are disregarded, VAT implications arise when the legal entity supplies services to third parties in the UAE.

Under Article 32 of the Executive Regulations, determining the “establishment most closely related to the supply” is critical when a business has multiple establishments (head office and UAE branch) participating in the supply chain.

Relevant criteria include:

Which establishment is contractually obliged to make the supply,
Who executes the supply and bears operational risks,
Which establishment issues invoices and collects payment,
The extent of human and technical resources contributing to the supply,
The location where key management and commercial decisions are made.

Correctly applying this test ensures accurate place-of-supply determination, especially in intercompany service flows where the UAE branch provides preparatory or ancillary activities while the head office contracts with UAE customers.

5. Common Pitfalls and Compliance Risks

Several errors often arise in practice:

Misidentifying the “establishment most closely related to the supply,” resulting in incorrect VAT treatment and exposure during FTA audits.
Insufficient documentation to demonstrate that the branch’s activities relate to taxable supplies made by the legal entity.
Insufficient documentation to demonstrate that the branch’s activities relate to taxable supplies made by the legal entity.
Insufficient documentation to demonstrate that the branch’s activities relate to taxable supplies made by the legal entity.Incorrectly disallowing input VAT recovery on branch costs despite eligible linkage with taxable supplies.

Multinational entities should align their contracting, invoicing, and operational structures with VAT law to mitigate compliance risks.

6. Global Perspective: Alignment with International VAT Treatment

In jurisdictions adhering to destination-based VAT principles:

Branch-head office transactions are typically out of scope.
Input VAT may be recovered subject to direct or indirect attribution to taxable supplies.

The UAE’s treatment aligns with international best practices, supporting a neutral VAT framework for cross-border intra-entity structures.

7. Actionable Steps for Businesses

To ensure robust VAT compliance:

Review intra-entity billing and ensure VAT is not incorrectly applied on branch-head office transactions.
Document the linkage between UAE branch expenses and the taxable/deemed taxable supplies of the legal entity to support input VAT recovery.
Analyze operational structures using the “most closely related establishment” test for services provided to UAE customers.
Maintain clear internal policies and training for tax and finance teams to ensure consistency in treatment
Prepare for potential FTA audits by maintaining an intra-group VAT file with:

1. Intercompany agreements,

2. Functional and risk analysis,

3. Place-of-supply assessments, and

4. Input tax recovery justifications.

Conclusion

Under UAE VAT Law, a UAE branch and its foreign head office are treated as a single legal person, meaning services between them fall outside the scope of VAT. However, input VAT recovery on related costs is still permissible if the expenses are linked to taxable or deemed taxable supplies. While intra-entity transactions themselves are disregarded, applying the correct place-of-supply analysis remains crucial for transactions with third parties involving UAE branches and foreign head offices. By ensuring proper structuring, documentation, and application of these principles, businesses can maintain compliance while optimizing their VAT positions effectively.

How Stratify Consulting Can Assist

At Stratify Consulting, we specialize in:

VAT compliance reviews for multinational structures,
Structuring cross-border operations to optimize VAT treatment,
VAT health checks before FTA audits,
Drafting intra-group service agreements with correct VAT positioning,
Assisting in FTA clarifications to secure binding positions on complex scenarios.

For a confidential discussion on your VAT structuring or to arrange a VAT health check for your UAE operations, contact our technical VAT team.