UAE Federal Supreme Court: A New Decision on Zero-rating the Supply of Means of Transport
September 26, 2023
Since its inception over five years ago, the UAE’s taxation system has witnessed an escalating number of tax disputes, with several disputes reaching the Federal Supreme Court. Recognizing the need for consistent guidelines, the Federal Supreme Court has been at the forefront, establishing essential tax principles and precedents for both the UAE’s Federal Tax Authority (FTA) and taxpayers. Recently, the Court deliberated on the zero-rating of transport supplies for UAE VAT. This article provides an in-depth analysis of the Court’s ruling on this matter.
Key Principles Outlined by the Court
In its latest verdict, the Federal Supreme Court recognized nine critical principles. Of these, four pivotal ones are elaborated below:
- Zero-rating the Supply of Means of Transport: The Federal Supreme Court referenced Article 34(1) of Cabinet Decision No. 52 of 2017 on the Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax. Emphasizing the article’s provisions, it was reiterated that an aircraft is eligible for zero-rating only when used for “commercial transport” and not intended for leisure, recreation, or sports. The court further emphasized the necessity of interpreting tax law provisions in tandem, underscoring their interdependence.
- Identification of the Supplier: The court affirmed specific criteria for identifying the supplier in a transaction. Notably, the ownership of the aircraft supplied and the owner’s direct contracting, devoid of third-party references, signal the supply being from that owner.
- Determination of the Place of Supply: While the Federal Supreme Court acknowledged the VAT legislation’s place of supply rules, it refrained from setting universal principles. The Court restricted its comments to the relevance of these rules for the case at hand.
- Settlement of Payable Tax: Tax obligations are deemed due once the pertinent tax period concludes, as per the Court’s reaffirmed legal standpoint. This mandates taxpayers to fulfill these obligations within the legally specified duration. The Court consistently asserted that tax returns, assessments, and voluntary disclosures are procedural formalities. Any failure in settling dues post the relevant tax period constitutes a legal breach, incurring administrative penalties.
For a more detailed understanding, an informal translation of the judgment text is available at the conclusion of this article.
As the UAE’s taxation infrastructure matures, the ascending tax disputes underscore the need for the Federal Supreme Court’s decisive involvement. The Court’s recent ruling on the zero-rating of transport supply provides a fresh perspective on this dynamic tax environment. The elucidation of the prerequisites for zero-rating transport supply, pinpointing the transaction’s supplier, the significance of place of supply rules, and the emphasis on prompt tax payments underscore the Court’s dedication to offering lucid guidelines for the FTA and taxpayers. Such ongoing clarity is paramount for maintaining the robustness and efficacy of the UAE’s taxation mechanism.
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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(1) Judgment “Validity of judgment: Validity of cassation judgment: Validity of the legal mattered determined by the contested judgment”.
- Overturning the judgment and referring the lawsuit to the court that issued it. Its effect. The referral court is obligated to follow up on the overturned judgment regarding the legal matters it adjudicated. Reasoning for that. The overturned judgment is probative in terms of the matters it decided on. The referral court built its judgment on a new understanding of the facts of the lawsuit or its conduct whether it was permissible before the issuance of the overturned judgment. It is permissible. The condition for that. Its judgment does not conflict with the basis on which the cassation judgment was based. The contested judgment adhered to the overturned judgment regarding the Appellant’s liability to value-added tax and the late payment penalty, based on its tax return. It is correct. The challenge against the judgment on grounds of its violation of the law. Such challenge is baseless.
- (2, 3) Taxes “Value added tax: Scope of taxation: Supply of goods. Zero-rated supplies. The extent to which aircraft are subject to tax”.
(2) Exempting the supply of aircraft from value-added tax and subjecting it to a zero rate. Its basis. Use of the aircraft for the purpose of commercial transportation. Aircraft design for recreation, pleasure or sports. Its effect. Aircraft is taxable. Basis for that. Article 34 of the Executive Regulations of Law No. 8 of 2017.
(3) The Appellant acknowledged that the aircraft belongs thereto and that it is a private jet used for the flights of owners, and that the Appellant was the one who concluded the jet charter agreement, and that the papers submitted by the Appellant were proved to be free and clear of the accounts of the sister company. Its result. The Appellant concluded the disposition and is subject to value added tax. The challenge against the judgment in terms of deficiency of causation and flawed reasoning on grounds that the sister company is a different corporate from the Appellant. It is unsound challenge.
(4) Taxes “Value added tax: Scope of taxation: Supply of goods: Rules related to supply: Place of supply of services and place of residence: Export as a reason for tax exemption”.
- Export as a reason for exemption from value-added tax. Its meaning. Goods leaving the State’s territory or providing services to a person whose incorporation or facility is located outside the State. The focus point of the place of supply is the company’s headquarters or a facility affiliated with it in the State. The basis for that. Article 29 and 32 of Law No. 8 of 2017, and Article 31 of its Executive Regulations. It is proven that the Appellant provided administrative services subject of taxation in the Emirate of Dubai to a recipient of a service based in the same emirate. Its result. The Appellant is not exempt from tax and the actions of the administrative authority appealed against is valid. Challenge against the judgment in terms of deficiency in causation on grounds that the supply was made from the company’s branch in Iraq. Such a challenge is baseless.
(5-9) Taxes “Obligation to pay a tax debt: Late payment of tax: Late payment penalty on tax return and voluntary disclosure: “Tax assessment”: Essential data for tax assessment: Invalidation of the assessment due to defective procedures: The authority of the administrative judge to determine the legal position of the taxable person, up to the extent of the administrative authority’s breach”.
(5) Legal obligation to pay tax dues. When it arises. Once the tax period ends. Its effect. The tax must be paid within the legal time limit for payment. The period lapses without payment. Its result. The taxable person commits a late payment violation, and a late payment penalty is imposed on him. Reasoning for that. Tax returns and voluntary declarations are executive procedures for tax eligibility and do not postpone it. The contested judgment’s conclusion upholds the appealed judgment requiring the Appellant to pay a late payment penalty for failing to pay the tax. Correct. The challenge against the judgment that it made an error on grounds that it is not permissible to impose an administrative penalty on the Appellant because there was no error on its part. An argument over the trial court’s authority which shall not be raised.
(6) The name of the taxable person and a statement of its establishment. These are the essential data that must be taken into account in the tax assessment. Basis for that. Article 21 of the Executive Regulations of the Tax Procedures Law.
(7) Invalidity resulting from a defective procedure. Only by a fundamental procedure that violates the basic rights of the taxable person.
(8) To determine the extent to which the legal position of the taxable person has been achieved, in order to clarify the extent of the administrative authority’s violation of his rights. The administrative judge may extend his oversight to all evidence and circumstances accompanying the case presented.
(9) It is proven that the Appellant is subject to value added tax. Its effect. The administrative authority may apply penalties for tax differences and the voluntary disclosures thereon. Its adherence to a non-essential procedural defect in the decision. Baseless challenge. Reasoning for that. The purpose of the procedure was realized with the Appellant’s supposed knowledge that the tax return must be submitted within the legal deadline after the end of the tax period.
1- It is established, in the judicial practice of this court- that if the judgment is overturned and the case is referred to the court that issued the contested judgment, that court must follow the overturned judgment on the legal matter decided on. The legal matter in this context means the incident that was presented to the Federal Supreme Court, and it gave its opinion thereon thoroughly and carefully. Its judgment in this regard has res judicata within the limits of what is proven therein. When examining the case, the referral court shall refrain from violating such res judicata. This is also prohibited by the Court of Cassation itself. The referral court may base its judgment on a new understanding of the facts of the case, which it collects from all the elements of the case. Moreover, it may adopt a ruling that was permissible before issuing the overturned judgment. However, it is obligated that its judgment does not conflict with the basis on which the cassation judgment was built. In its judgment, it adheres to removing the defect of deficiency, thus achieving what is required of the overturned judgment. That being the case, the contested judgment determined that the Appellant was subject to value-added tax in accordance with Article 34 of Value-Added Tax Law No. 8 of 2017, on the basis that the Appellant acknowledged in its defense memorandum that the ……. Company is wholly owned by the Appellant and that the supply took place within the state; therefore, it is subject to the value-added tax and the legally prescribed late payment penalty. Thus, the conclusion of the contested judgment is valid, as soundly drawn from the documents and with sufficient justification. Accordingly, the challenge that the judgment violated the law due to its failure to adhere to the limits of the overturned judgment is based on no basis and is worthy of dismissal.
2- It is established that Article 34 of the Executive Regulations of VAT Law No. 8 of 2017 issued by Cabinet Resolution No. 52 of 2017 provides that “The supply of the means of transport shall be subject to the zero rate in the following cases: 1. A supply of an aircraft that is designed or adapted to be used for commercial transportation of passengers or Goods and which is not designed or adapted for recreation, pleasure or sports.” The basis of the exemption that applies to the judgment, whether existent or non-existent, is the use of the aircraft for the purpose of commercial transportation and it was not designed for recreation, pleasure or sports. Whereas the provisions of the tax law are considered a single whole that complements each other and its phrases must be interpreted in a way that does not prevent any conflict amongst them. The principle in legal provisions that regulate one subject is to refrain from separating them from each other, considering that they form a unit whose parts are integrated, whose meanings are intertwined, and whose orientations are united to form a harmonious unity.
3- That being the case, it is established in the Appellant’s admission in its email dated 19/09/2019 that the aircraft is owned by the Appellant and is a private jet that is used for owners’ flights, and that the Appellant is the one that concluded the jet charter agreement. It is established from the papers, documents and translated documents submitted by the Appellant Company that they were free and clear of the accounts of the sister company. This concludes that the Appellant entered into the disposition. Thus, the Appellant is subject to value added tax. The contested judgment reasoned the Appellant Company’s taxability based on the foregoing. Thus, the challenge of deficiency in causation and flawed reasoning against the contested judgment on grounds that the judgment was based on that the appellant acknowledged in its memorandum that the ……. Company is wholly owned by the Appellant and is a different entity from the Appellant – is baseless and worthy of dismissal.
4- It is established that Article (29) of the said VAT Law provides that the place of supply of services is the supplier’s place of residence. Article (32) thereof provides, “The Place of Residence of the supplier or Recipient of Services shall be as follows: 1. The state in which the Person’s Place of Establishment is located or where he has a Fixed Establishment …”. Article (31) of the Executive Regulations of the said law defined export as goods leaving the state’s mainland or providing services to a person whose establishment or facility is located outside the state. This means that the legislator considered the place of supply to be the supplier’s place of residence, which is the company’s place of establishment, or the company to have an establishment in the state. That being the case, it is proven that the Appellant provided the taxable administrative services in…. to the recipient of these services, the ……. Holding Company, which is also headquartered in …… as admitted by the Appellant in its email dated 19/09/2019. Thus, the Appellant is not entitled to the exemption stipulated in the aforementioned provisions. The Respondent administrative authority has exercised its authority within the limits of its jurisdiction, and the challenge -which is deficiency in causation and violating the right to defense because the supply was made from the Company’s branch in Iraq, thus the Appellant should be exempt from tax- against the judgment shall be, in this regard, baseless and worthy of dismissal.
5- It is established -in the judicial practice of this court- that the legislator’s determination regarding the acquisition of tax receivables payable is generated once the tax period ends, giving rise to a legal obligation to pay the tax within the legal period specified for such payment. This confirms that tax returns, assessments and voluntary disclosures are just templates. Thus, when the deadline for paying the tax expires and the taxable person does not pay it, he will be committing a violation of late payment of the tax and shall be subject to Clause 9 of Table No. 1 attached to Cabinet Resolution No. 40 of 2017. That being the case, it was also proven that the Appellant failed to pay the tax, inevitably requiring, by virtue of logical necessity, its obligation to pay penalties. Whereby, the contested judgment issued in support of the appealed judgment shall be based on its reasons. Accordingly, the challenge -that it is not permissible to impose administrative penalties on the Appellant because there was no error on its part as the Appellant is not taxable- is an argument over the authority of the trial court, which cannot be raised before the Supreme Court and is therefore inadmissible.
6- It is established that Article 21 of the Executive Regulations of the said Tax Procedure Law issued by Cabinet Resolution No. 36 of 2017 specified the data that must be taken into account in the tax assessment, including the name of the taxable person and his or her establishment information.
7- It is established that invalidation for violating a defect in procedures is only for a fundamental procedure that violates the basic rights of the taxable person.
8- In all cases, the administrative judge is authorized to extend his oversight over all the evidence and circumstances accompanying the case presented to him and the resulting facts, and weighs them based on legitimacy and legality to determine the extent to which the legal position of the person concerned is realized, in order to clarify the extent to which the administrative authority’s behavior violates the rights of the taxable person, in light of the above rules and provisions.
9- That being the case, it is established that the Appellant is subject to value added tax in accordance with the law. Accordingly, the administrative authority has the right to apply penalties for tax differences and the voluntary disclosures thereon. This shall not be affected by the Appellant’s adherence to a non-essential procedural flaw of the decision, as the purpose of the procedure was achieved with the Appellant’s supposed knowledge of the law according to Article 64 of the Executive Regulations of the Value Added Tax Law, which requires the taxable person to submit the tax return no later than the twenty-eighth day after the end of the tax period. It is imperative that no one is excused for his ignorance of the law as long as the means of publication are available, so knowledge of the law is assumed by all. Accordingly, the challenge -that the notice of tax assessment and the notice of penalties assessment are invalid because the tax assessment is based on the statement that the Appellant submitted incorrect tax returns in violation of Article 21 of the Executive Regulations of the Tax Procedures Law- is baseless.
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