In a recent landmark judgment on September 20th, 2023, the UAE Federal Supreme Court, delivered a significant ruling in a VAT-related case. The case dealt with the question of whether a taxable person from a Gulf Cooperation Council (GCC) country that does not apply value-added tax (VAT) should be exempt from VAT obligations in the UAE. The court’s decision shed light on the legal framework governing tax obligations and the criteria for VAT exemption, impacting individuals and businesses from GCC countries.
- Tax Obligations: A Legal Perspective
The court began by emphasizing that tax obligations are not contractual obligations arising from mutual consent but are rooted in the law, with the aim of safeguarding the interests of society. The taxable person, in this context, is the individual or entity who is found to have a connection with the money that is subject to the tax burden.
- Value-Added Tax (VAT) Criteria
To provide clarity on the matter, the court referred to Federal Decree Law No. 8 of 2017, which defines VAT as a tax imposed on the import and supply of goods and services at various stages of production and distribution. The decisive factor in determining VAT liability is the event of importing and supplying goods and services in exchange for financial consideration.
- Legal Basis of VAT Obligation
The court reiterated that the legal basis for a taxable person’s obligation to pay VAT is derived from the law. According to Article 2 of Federal Decree Law No. 8 of 2017, every supply of goods in exchange for financial consideration is subject to VAT. In the case at hand, the appellant admitted to importing equipment into the UAE for repair purposes and incurring VAT on repair services and the purchase of some goods from local suppliers.
- GCC Countries and VAT Implementation
The crux of the matter revolved around whether the Kingdom of Saudi Arabia (KSA) applied the VAT law, as the UAE had an agreement with GCC countries regarding VAT. The appellant claimed exemption based on the belief that KSA did not implement the VAT law. However, the court refuted this argument with evidence from Saudi Royal Decrees and Orders indicating that KSA indeed implemented VAT. Additionally, the provisions of Article 67 of the Executive Regulations of UAE’s VAT law did not apply to the appellant’s case, further solidifying their VAT obligation.
- Interest in Dispute (Standing) as a Legal Concept
The court also addressed the concept of interest (standing) in the context of the lawsuit. It established that the lawsuit’s foundation, as per Article Two of the Civil Procedure Law, must be based on real interest, either current or potential. Real interest refers to cases where the contested judgment or procedure negatively impacts the appellant by dismissing their requests, maintaining obligations from which they seek release, or depriving them of claimed rights.
- Inadmissible Challenge
The appellant claimed an interest in the lawsuit, arguing that they had fulfilled all legal requirements, and the Respondent should exempt them from VAT. However, the court found that the dispute had been settled, with the Respondent refunding the disputed amount to the appellant. Consequently, the appellant no longer possessed a real interest in the case, and their challenge was deemed inadmissible.
To this end, the UAE Federal Supreme Court’s judgment in this case provides clarity on the legal framework governing tax obligations, VAT criteria, and the importance of real interest/standing in tax litigation. This ruling reaffirms the principle that tax obligations are founded on the law, and the determination of VAT liability hinges on the specific circumstances of each case, regardless of a GCC country’s VAT implementation status. The case serves as a crucial precedent for individuals and businesses from GCC countries operating in the UAE, reinforcing the importance of complying with VAT regulations and understanding the legal implications.
This Article is prepared by Mohamed El Baghdady, Head of Tax and Financial Crimes, and Marwan Alnooryani, Senior Tax Associate, at Habib Al Mulla & Partners Law Firm.
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