How the Reverse Charge Mechanism Works Under UAE VAT
The Reverse Charge Mechanism UAE is one of the most important VAT concepts that every business must understand to stay compliant and avoid costly penalties. It completely changes the way VAT is handled for certain transactions—especially cross-border services and goods imported into the UAE.
In this blog, we explain how the Reverse Charge Mechanism works under UAE VAT, when it applies, and what businesses must do to stay compliant.
What Is the Reverse Charge Mechanism?
The Reverse Charge Mechanism (RCM) is a VAT rule where the responsibility of accounting for VAT shifts from the supplier to the buyer.
In the UAE VAT system, it is mainly applied to imports of goods and services.
Instead of the foreign supplier charging VAT, the UAE-based buyer self-accounts for VAT in their UAE VAT return.
In simple words:
The supplier does not charge VAT — the buyer declares both Output VAT and Input VAT on the same transaction.
This is why it is a key compliance area under the Reverse Charge Mechanism UAE regulations.
Why Does the UAE Use the Reverse Charge Mechanism?
The UAE applies the Reverse Charge Mechanism to:
Maintain tax fairness between local and foreign suppliers
Ensure VAT is paid where consumption happens
Simplify VAT for foreign companies not operating in the UAE
Prevent tax leakage on imports
Make compliance easier for international trade
This method keeps UAE businesses compliant without forcing foreign suppliers to register for VAT in the UAE.
When Does the Reverse Charge Mechanism Apply in the UAE?
The Reverse Charge Mechanism UAE applies in the following key situations:
1. Import of Services
When a UAE company receives services from a supplier outside the UAE.
Examples:
Digital marketing services
Software subscriptions
Consultancy services
Cloud hosting
Online training services
2. Import of Goods
When goods are imported into the UAE and cleared by UAE Customs.
3. Supply of Gold & Diamonds (B2B)
In certain B2B transactions, VAT is shifted to the buyer.
4. Supply of Crude or Refined Oil, Gas, and Energy
In specific regulated scenarios.
5. Supply of Investment Precious Metals by the Supplier
When the conditions of purity and trade are met.
How the Reverse Charge Mechanism Works Under UAE VAT
Here is the exact workflow:
Step 1 — Supplier issues an invoice with 0% VAT
Foreign suppliers do not charge UAE VAT.
Step 2 — Buyer (UAE business) must calculate VAT
The buyer calculates 5% VAT on the taxable value of goods or services.
Step 3 — Declare Output VAT
The buyer adds the VAT amount under Output Tax in the VAT return.
Step 4 — Claim Input VAT
If eligible, the same amount is also claimed as Input Tax, resulting in no cash payment unless input is blocked.
Step 5 — Maintain documentation
Businesses must maintain:
Import documents
Contracts
Tax invoices
Custom declarations
Proof of reverse charge entries
This ensures smooth FTA audits.
Example of Reverse Charge Mechanism UAE
A UAE company buys a software subscription worth AED 10,000 from a UK supplier.
Supplier charges: AED 0 VAT
UAE company must self-account:
Output VAT (5%) → AED 500
Input VAT (5%) → AED 500
Net VAT payable = AED 0
(If fully recoverable)
How to Report Reverse Charge in the UAE VAT Return
Businesses must report RCM transactions under:
Box 3 — VAT on goods imported into the UAE
Box 6 — VAT on services imported into the UAE
Input VAT can be recovered under Box 10 if eligible.
Failure to report the Reverse Charge Mechanism UAE properly can lead to serious penalties.
Common Mistakes Businesses Make
Not declaring imported services under RCM
Claiming input VAT without declaring output VAT
Incorrectly entering values in the VAT return
Missing documentation during an FTA audit
Not applying RCM on digital and online services
These mistakes can trigger VAT audits and financial penalties.
Reverse Charge Mechanism: Compliance Tips for UAE Businesses
Always check supplier’s location
Verify whether the service qualifies as imported
Maintain proper VAT documentation
Reconcile accounts monthly
Review VAT return entries before submission
Seek professional guidance for complex transactions