1. Background – The Rise of Global Talent Mobility
In today’s borderless economy, many organizations expanding into the UAE prefer a flexible workforce model before fully setting up local operations.
It is common for international businesses to engage service providers to sponsor and manage employees locally on their behalf — covering visa formalities, payroll, and compliance until their own entity is licensed.
While this arrangement is practical from an operational perspective, it introduces complex VAT implications. A key question often arises:
When a UAE-based service provider hires or sponsors employees on behalf of an overseas client, does this qualify as a taxable supply, and if so, can it be zero-rated as an export of services?
The answer depends on how the law defines place of residence, consideration, and supply of services, and whether the recipient is outside the UAE at the time the service is performed.
2. The Legal Framework
Under the UAE VAT Decree-Law and its Executive Regulations, the following concepts are critical:
• Taxable Supply: Any supply of goods or services for consideration made in the course of business within the UAE.
• Export of Services: A supply made to a recipient who does not have a place of residence in the UAE and is outside the UAE at the time the service is performed.
• Zero-Rating: Certain supplies, such as exports, may be charged at 0% VAT if the conditions under Article 31 of the Executive Regulations are met.
• Place of Establishment / Fixed Establishment: A location where a person conducts significant management functions or has sufficient human and technical resources to carry out business on a regular basis.
Simply put, the VAT treatment depends on where the client “lives” for VAT purposes — not where the workforce is physically present.
3. When Does the 0% Rate Apply?
The zero-rating of exported services is allowed when all of the following conditions are satisfied:
1. The recipient does not have a place of establishment or fixed establishment in the UAE.
2. The recipient is outside the UAE at the time the service is performed.
3. The service is not connected with UAE-based real estate or moveable property.
4. The benefit of the service is not received by another person in the UAE (unless that person makes fully recoverable taxable supplies).
If these criteria are met, services supplied by a UAE entity to a non-resident client can be zero-rated — meaning VAT is charged at 0%, though the supplier can still recover input VAT on related costs.
4. Manpower Supply vs. Employee Leasing
In a typical workforce-outsourcing model:
• The UAE-based provider legally sponsors the employee, arranges the visa, medical insurance, and payroll.
• The client abroad determines job duties, working hours, and performance.
• The service provider receives two payments:
1. Funding for salaries and employee-related costs, and
2. A professional or service fee for managing the arrangement.
The crucial VAT consideration lies in determining who benefits from the service and where that benefit is consumed.
If the overseas client is truly non-resident, has no fixed establishment in the UAE, and the employees are temporarily placed while the client is still setting up operations, the entire service — including salary funding and professional fees — may qualify as a zero-rated export of services.
However, once the client establishes a legal entity or office in the UAE, the situation changes.
5. When VAT at 5% Becomes Applicable
Once the client has a registered presence or fixed place of business in the UAE, it is considered a resident for VAT purposes.
At that point, any service provided to that client — including manpower supply, employee management, or administrative support — is treated as a domestic taxable supply and is subject to VAT at the standard rate of 5%.
This applies even if the payment continues to come from an overseas bank account.
The determining factor is where the client’s operations and benefit from the service are located, not the location of payment or contract signing.
6. Practical Scenarios and Compliance Takeaways
Scenario 1: Non-Resident Client (Zero-Rated)
A UAE service provider supplies employees to a foreign company that has not yet established any presence in the UAE. The staff work temporarily to support market entry. Services may be zero-rated, provided all Article 31 conditions are met.
Scenario 2: Client with Fixed Establishment (5% VAT)
After several months, the same client opens a licensed branch or subsidiary in the UAE where those employees continue to work. The client now has a fixed establishment; the supply becomes subject to 5% VAT.
Scenario 3: Mixed Arrangements
Where part of the work benefits the overseas head office and part benefits the UAE branch, the provider must allocate consideration appropriately and apply VAT only to the domestic portion.
7. Key Insights for Businesses
1. Assess the Client’s Residency Status Carefully
Before invoicing, confirm whether the client maintains a fixed establishment in the UAE. Residency status can shift quickly during expansion.
2. Document Each Relationship
Contracts should clearly specify the client’s role as the functional employer, the scope of the service, and the client’s place of residence for VAT purposes.
3. Separate Funding and Fees
Even if the salary funding passes through the provider, it can still form part of taxable consideration unless properly documented as a pass-through reimbursement.
4. Review Contracts Regularly
Once the client becomes locally established, re-evaluate the VAT treatment immediately to avoid under-collection of tax.
5. Maintain Transparent Accounting
Keep supporting evidence of employee sponsorship, visa records, and instructions from the non-resident client to justify zero-rating during audits.
8. Conclusion – Clarity Before Contracts
Cross-border workforce models play a vital role in helping global companies build a presence in the UAE.
However, VAT compliance in such arrangements hinges on technical definitions of “residency,” “benefit,” and “consideration.”
For service providers, a disciplined approach — assessing each client’s establishment status, separating exempt and taxable elements, and maintaining clear documentation — ensures the right VAT treatment from day one.
In essence, what begins as an export of services today could easily become a domestic taxable supply tomorrow. Knowing when that shift occurs is key to staying compliant, avoiding penalties, and building long-term trust in the UAE’s dynamic business environment.
