What Is Reverse Charge Mechanism in UAE VAT?
Under a normal transaction, the supplier charges VAT and remits it to the FTA.
Under the Reverse Charge Mechanism (RCM), responsibility shifts from the supplier to the recipient. The UAE business self-assesses VAT and reports it in its VAT return.
The mechanism exists primarily to ensure VAT collection where overseas suppliers are not registered for UAE VAT.
When Does RCM in UAE VAT Apply?
Common situations include:
Imported Services
- Software subscriptions
- Overseas consultants
- Foreign marketing agencies
- Technology platforms
Imports from Non-Resident Suppliers
Where the supplier is outside the UAE and not charging UAE VAT.
Certain Designated Zone Transactions
Specific movements of goods between designated zones and mainland UAE can trigger reverse charge obligations.
Reverse Charge Mechanism Example
Let’s say a Dubai company purchases software licenses from a US supplier.
Invoice value: AED 20,000
Supplier VAT charged: AED 0
UAE VAT under RCM:
AED 20,000 × 5% = AED 1,000
The UAE company reports:
- AED 1,000 output VAT
- AED 1,000 input VAT (if recoverable)
Result: Typically, no cash cost if fully recoverable.
Accounting Entry for Reverse Charge Mechanism in UAE
Using the software subscription example:
Initial Entry
| 1. Software Expense Dr 20,000
2. Accounts Payable Cr 20,000 |
Reverse Charge VAT Entry
| 1. Input VAT Recoverable Dr 1,000
2. Output VAT Payable Cr 1,000 |
This reflects the self-accounting requirement imposed under RCM.
This will also be reflected in the VAT return of the Company.
What are the Benefits of RCM?
-
Improved Cross-Border Trade
Foreign suppliers need not register solely to collect UAE VAT.
-
Cash Flow Efficiency
Businesses with full recovery rights often report both output and input VAT simultaneously.
-
Better VAT Administration
The FTA can collect VAT through UAE-registered recipients rather than overseas vendors.
Common RCM Errors
Businesses frequently:
- Fail to account for imported services.
- Misclassify designated zone transactions.
- Recover input VAT without sufficient evidence.
- These errors are often identified during VAT health checks and audits.
Practical Scenario
A free zone company purchases annual cloud hosting from a UK provider for AED 50,000.
No VAT appears on the supplier invoice.
The UAE business must calculate UAE VAT and report it under the reverse charge.
