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A European consumer goods company without a legal presence in the UAE engaged a UAE-based manufacturer to produce excisable goods on its behalf. The European principal intended to retain economic ownership of the goods and resell them to a UAE-based distributor, with no physical involvement in local storage, customs, or inventory management. The company sought clarity on VAT and Excise Tax obligations, the appropriate supply chain structure, and whether UAE VAT registration would be required.
In the proposed transaction, the UAE manufacturer would produce and deliver the goods to a UAE distributor on instructions from the foreign principal. The manufacturer would issue a commercial invoice to the German company, while the German company would then invoice the UAE distributor for onward sale. The goods would never leave UAE territory and were intended for consumption within the local market.
Our initial analysis focused on identifying the place and nature of the supply. Since the goods remain within the UAE, and are not exported, the transaction does not qualify as a zero-rated export under Article 45 of the VAT Decree-Law. Instead, it is a domestic supply of goods and therefore subject to the standard 5% VAT, in accordance with Articles 2 and 3 of Federal Decree-Law No. 8 of 2017. The initial sale from the manufacturer to the German company is taxable, and the resale by the German company to the UAE distributor is also considered a taxable supply.
However, because the German company is not importing the goods via UAE customs, it is not treated as making a “supply of goods” for VAT purposes. Rather, the resale is treated as a supply of services, specifically an arrangement or facilitation of the delivery of goods already located in the UAE. This has direct implications for VAT registration.
If the UAE distributor is VAT-registered, the transaction would fall under the Reverse Charge Mechanism (RCM), where the UAE recipient accounts for VAT on behalf of the non-resident supplier. In such cases, the German company is not required to register for VAT in the UAE, provided the distributor correctly accounts for the VAT under RCM. However, if the UAE distributor is not VAT-registered, then the German company would be mandatorily required to register for VAT, regardless of whether its taxable supplies cross the AED 375,000 threshold. This rule applies uniquely to non-resident suppliers of services, who must register immediately upon making any taxable supply to an unregistered UAE recipient.
We also advised on Excise Tax implications, since the product in question fell under the excisable category. Excise Tax is triggered at the point of production, and under UAE Excise Tax law, the responsibility for declaring and paying excise lies with the producer — in this case, the UAE-based manufacturer. The excise amount is calculated based on the declared retail selling price (RSP) and is built into the pricing structure. The German company, as the purchaser, indirectly bears the excise cost as part of its commercial arrangement with the manufacturer but is not the party responsible for compliance with excise obligations.
In addition to tax classification, we addressed practical compliance risks, particularly concerning banking and AML screening. Since the German company is not appearing on UAE customs documentation and no export is taking place, local banks may question B2B cross-border payments without accompanying proof of import or export. We recommended that the German company coordinate closely with its bank to ensure payment instructions reflect the service nature of the transaction (rather than a goods export) to avoid unnecessary holds or queries under AML protocols.
To provide a more systemic and long-term solution, we recommended that the German company establish a UAE presence through either:
- A UAE branch of the foreign entity, or
- A locally licensed Free Zone or mainland company
This would enable the company to issue VAT-compliant invoices directly within the UAE, register formally for VAT and Excise if required, and eliminate documentation ambiguity in the supply chain. It would also simplify tax reporting, allow for smoother banking transactions, and strengthen local commercial credibility.
In conclusion, we advised the client to structure the transaction as follows:
- Accept that the resale within the UAE is subject to 5% VAT.
- Where the UAE distributor is VAT-registered, apply RCM, allowing the German company to remain outside the UAE VAT registration net.
- Where the UAE buyer is not VAT-registered, the German company must register immediately and charge VAT.
- Ensure that excise tax is managed by the UAE manufacturer and priced into the purchase agreement.
- Clearly document the nature of the transaction as a service supply within the UAE, and prepare supporting documentation to explain the VAT and payment trail in case of FTA or bank inquiries.
- Establish a UAE branch or company to manage future transactions more systemically, reduce exposure, and ensure local regulatory alignment.
