Dubai Marina. A breezy evening. Boats in the harbor. Two friends at an outdoor table. One runs a regional tech firm. The other audits books for a living.
Amir stirred his espresso slowly. The last of dinner plates had been cleared. Around us, the buzz of soft music and quiet chatter rolled across the waterfront. Then he leaned in and said, “I think Quantum Core’s messing with me.”
I looked up. “Quantum Core? The systems development firm?”
He nodded. “We hired them to build out our ERP stack. Project started smoothly, but now their invoices are a disaster. Some have 5% VAT. Some show zero. A couple don’t list VAT at all. They even labeled one charge ‘out of scope’. I don’t get it. How can the same company treat the same kind of work so differently?”
I smiled. “They’re not messing with you. They’re probably doing it right. You’re looking at how VAT works in the UAE across borders.”
He raised an eyebrow. “So this is normal?”
“Let’s break it down,” I said.
Amir’s company operates across the GCC. His headquarters are in Dubai, but his clients range from Riyadh to Frankfurt. For this ERP build, Quantum Core used teams from multiple countries. Their core devs worked from Karachi. The database layer was managed in Belgrade. Final system testing happened at Amir’s Dubai office. The service delivery was layered.
“The project you ran on-site in Dubai, with their engineers flying in,” I said, “that part is easy. Services physically performed in the UAE, for a UAE entity, get standard-rated. That’s the 5% you saw.”
He nodded. “Makes sense so far.”
“Then you had them build a secondary module for your Saudi team. All the coding was done remotely. Delivered via a private cloud. No UAE server. No UAE-based staff involved. Right?”
“Exactly. Whole thing handled between their offshore team and our Riyadh branch.”
“That one’s a classic zero-rated supply. The UAE VAT law allows zero-rating for services exported to non-UAE clients, as long as the service is delivered from within the UAE and the client doesn’t visit the UAE during the service.”
“But they didn’t even use their UAE office for it,” he said.
“Which is why they may have marked it ‘out of scope’. If no part of the service was connected to the UAE i.e. no staff, no server, no project management, then UAE VAT law doesn’t apply at all. It’s outside the system. So they don’t charge VAT, and they don’t report it. It just doesn’t exist for VAT purposes.”
Amir took a sip of his drink. “Okay. What about the cloud hosting fee they billed monthly? No VAT on that either.”
“That depends. Where are the servers?”
“In Germany.”
“And your users?”
“For that module, just our EU offices.”
“Then again, that’s either zero-rated or out of scope. If the hosting is provided entirely offshore and accessed offshore, the supply falls outside the UAE system.”
He frowned. “But what if Dubai staff log in occasionally?”
“Then the place of use changes. Even minimal use from the UAE could bring the transaction back under UAE VAT. It gets technical fast. That’s why service classification matters.”
He laughed, dry. “No kidding. And get this, they charged us for staff training after go-live. Onboarding our Dubai team. That one had 5% VAT again.”
“Of course. That’s local service. Delivered here, to UAE-based employees. Standard-rated.”
He paused. “They also built a reporting plugin for our EU compliance team. But this one said ‘exempt’ instead of zero or standard.”
I raised an eyebrow. “Was it licensed software or a one-time build?”
“They said it was a licensing model. Annual fee.”
“Then that’s probably a mistake. Software licenses are usually taxable unless they’re passive IP royalties, and even that’s a stretch. Exempt status mostly applies to financial services, certain education, and healthcare. Not IT development.”
“So should I push back on that?”
“Yes. Not because it’s wrong on purpose, but because incorrect classification can cost them. If they treat a taxable service as exempt, they can’t recover input VAT tied to that cost in addition to FTA penalties. It matters.”
Amir leaned back in his chair. The lights from a passing yacht caught his face. “I thought they were being inconsistent. But this sounds… complicated.”
“It is. But it’s not random. UAE VAT law categorizes services based on the place of supply, nature of service, and location of the client. A company like Quantum Core can legally issue four invoices with four different treatments, even in one project.”
“And all legit.”
“All legit. But only if documented properly. If the VAT treatment doesn’t match the work and location, they risk audits. And you risk denied input claims.”
He laughed again, quietly this time. “So they’re not scamming me. They’re just following the rules.”
“Exactly. You’re not seeing fraud. You’re seeing structure.”
The breeze picked up. The waiter dropped off the bill. Amir glanced at it, then looked up.
“I owe them an apology, don’t I?”
“You owe yourself a proper VAT consultant. But also an apology to them.”
We stood, walking toward the valet. Around us, Dubai moved forward. Structured. Fast. And never simple.
This article is for general informational purposes only and does not constitute legal, tax, or financial advice. The content is based on publicly available information and interpretations of UAE VAT laws as of the date of publication. Tax laws and regulations may change, and their application can vary based on specific circumstances. Readers should consult a qualified tax advisor or legal professional before making any decisions or taking any action based on the information provided. The author and publisher accept no responsibility for any loss or damage resulting from reliance on this content.
