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With international trade wars heating up in 2025, the market for global trade hasn’t been this intense. Businesses are looking to gain even the smallest edge to surpass their competition. Under these circumstances, a new model of trade is making ground. While the concept of Bill-to Ship-to has been around for a while now, Dubai’s business “tax-friendly” environment is giving this new meaning to economic substance.
Although the UAE tax authorities recognize the Bill-to Ship-to arrangement, they expect businesses to follow strict guidelines be transparent in their dealings. And, as some might say, the devil really is in the details. Getting it wrong can result in tax mismatches, Corporate Tax complications, International Tax & Transfer Pricing issues and even penalties from the Federal Tax Authority (FTA).
For importers, exporters, and intermediaries, these aren’t just technicalities, it can have long term impact on their tax reporting, legal obligations, and ultimately profitability. This blog provides a detailed overview of what a ‘Bill To Ship To’ transaction entails when shipping to the UAE and key compliance and taxation considerations to be mindful about.
The Bill-to-Ship-to model is a business arrangement where the entity that is billed for the goods (the Bill-to Party) is different from the entity that actually receives the physical delivery (the Ship-to Party). This setup is commonly used in international trade and group structures, allowing one entity—often a parent company or central office—to handle payments and invoicing, while goods are shipped directly to a subsidiary, distributor, or third party.
From a UAE perspective, this model requires careful compliance with maritime and commercial laws, as ownership of goods is typically transferred through documents such as the bill of lading. While the Bill-to Party remains responsible for payment and billing, the Ship-to Party must fulfil customs clearance and regulatory obligations. Correct documentation is essential to ensure smooth payment processing, legal transfer of ownership, and adherence to UAE tax and customs regulations.
In a standard “bill to ship” transaction, there are three parties involved:
Let us understand this with an example of the company structure for the Herbal Medicament arrangement for a bill to ship to a model in its international operations:
In this structure, Herbal Medicament India functions as the Supplier, undertaking the core manufacturing activities and shipping goods directly to the UK customer (or to the UK company in the case of consignment arrangements). From a tax perspective, the Indian entity is required to discharge income tax in India on profits attributable to its manufacturing and value-adding functions. It is important to note that transfer pricing principles mandate that the Indian company must be remunerated at an arm’s length price for the economic substance it contributes.
Simply invoicing a UAE entity at a value “just above FOB” with the objective of shifting the bulk of profits offshore is unlikely to be defensible under Indian transfer pricing regulations or OECD BEPS guidelines. Tax authorities increasingly examine the substance of functions, assets, and risks (FAR analysis) to ensure profits are aligned with where real economic activities are performed. Accordingly, the Indian Supplier must retain an appropriate level of profit commensurate with its role as the manufacturer and exporter. The UAE entity can legitimately capture residual profits only where it demonstrates substantive economic presence—such as undertaking significant distribution, financing, or strategic functions—from within the UAE.
In this arrangement, Herbal Medicament FZ-LLC in the UAE operates as the Bill-to Party. The UK entity contracts directly with the UAE company, which in turn procures goods from Herbal Medicament India. To support this model, the UAE company must demonstrate genuine commercial substance in the jurisdiction. Activities such as managing the international brand presence, overseeing digital marketing, maintaining the global website, and driving international sales strategy are critical value-adding functions that substantiate the UAE entity’s role beyond a mere invoicing intermediary.
From a tax and transfer pricing perspective, the UAE entity should earn a defensible margin aligned with the functions, assets, and risks it assumes. Profits allocated to the UAE entity must be proportionate to the demonstrated economic substance—such as brand building, customer relationship management, and strategic sales oversight. Merely inserting the UAE entity into the contractual chain without adequate substance could invite challenges under anti-avoidance rules, Indian transfer pricing audits, or OECD BEPS principles. Accordingly, clear documentation of the UAE entity’s operational activities, staff capabilities, and decision-making processes is essential to sustain its margin and ensure tax compliance across jurisdictions.
In this structure, Herbal Medicament UK Ltd functions as the Ship-to Party. Although the commercial invoice is raised by the UAE company, the goods are shipped directly from India to the UK customer or, in the case of consignment arrangements, to the UK company’s warehouse. The UK entity assumes responsibility for local customer interaction, collection of payments, charging and remittance of UK VAT, customs clearance, and final delivery of products within the UK market.
From a tax and compliance standpoint, it is critical that the UK entity earns an arm’s length margin for the distribution, logistics, and compliance functions it performs. Deliberately keeping the UK margin “as low as possible” to shift profits back to the UAE is unlikely to withstand scrutiny under UK transfer pricing rules, OECD BEPS guidelines, or HMRC’s anti-avoidance framework. The UK entity must be adequately compensated for its role in managing local regulatory obligations, bearing market risks, and providing frontline customer service.
This allocation of functions illustrates how the Bill-to-Ship-to model can operate effectively—where the UAE entity manages international sales and brand strategy, the Indian entity undertakes production and export, and the UK entity provides local market execution. To ensure the sustainability of this model, documentation and transfer pricing policies must reflect the economic substance of each entity’s contribution.
The UAE serves as a strategic intermediary in Bill-to-Ship-to operations due to its world-class infrastructure, extensive trade networks, and strong re-export capabilities. Goods can move efficiently from production hubs like India to end markets in Europe, Africa, and beyond, while the UAE entity handles invoicing, marketing, and sales coordination.
From a corporate tax and transfer pricing perspective, demonstrating genuine economic substance—through documented functions, risk allocation, and arm’s-length margins ensures that profits allocated to the UAE entity are defensible under local and international tax rules, making the UAE both a logistical and regulatory hub in global trade.
In a bill-to ship-to model, the invoicing entity and the shipment destination are different. For example, in this case, the UAE Co. raises an invoice, but the goods are shipped directly from India to the UK customer. Since the goods are located outside the UAE at the time of supply, the transaction is treated as out of scope for UAE VAT. This means:
It’s important to note that these supplies are not zero-rated in the UAE, they are outside the scope of VAT altogether.
Note: The difference matters: zero-rated supplies are taxable at 0% and allow input VAT recovery, but out-of-scope supplies do not. Proper documentation of the shipment (showing goods moving from India to the UK) is critical to justify this VAT treatment.
To stay compliant under the Bill-to-Ship-to model in the UAE, businesses need to handle both transactions correctly, maintain strong export documentation, issue invoices that follow custom rules, follow arm’s length principal, have adequate substance as per roles of various entities in value chain, incorporate UAE entity in designated free zone and clearly define roles in contracts. They also need robust systems to preserve records for 8 to10 years, carry out regular compliance checks, and stay aligned with the latest FTA updates. Only when all of these elements work together can companies have compliant bill to ship to transactions and avoid penalties.
The FTA treats Bill-to-Ship-to as two distinct supplies. The UAE entity’s sale may fall outside the scope of UAE VAT if export and contractual conditions are met. From a corporate tax and transfer pricing perspective, the UAE entity must demonstrate real commercial substance in invoicing, marketing, or risk management functions, and apply the arm’s-length principle when setting margins with related parties. Clear intercompany agreements, proper documentation of the agency or principal role, and robust transfer pricing files are essential to defend the tax position across jurisdictions.
In a Bill-to-Ship-to model, the goods are shipped directly from the supplier’s country (such as India) to the end customer (such as the UK) without ever entering the UAE. Since no physical movement of goods occurs through the UAE, the transaction undertaken by the UAE entity is regarded as outside the scope of UAE VAT. That said, the UAE entity must demonstrate genuine economic substance—such as managing brand, marketing, sales strategy, and invoicing—to justify its role in the value chain.
From a corporate tax and transfer pricing perspective, this requires maintaining robust intercompany agreements, applying the arm’s length principle, and preserving documentation that supports how margins are allocated among the supplier country, UAE, and customer entities. Proper structuring ensures compliance with UAE Corporate Tax, international tax norms, and mitigates challenges in audits or transfer pricing reviews.
In a Bill-to-Ship-to model, invoices serve as evidence of the UAE entity’s role as the contracting party, even though the goods are shipped directly from the supplier to the overseas customer. Since these transactions are outside the scope of UAE VAT, VAT invoice requirements (including TRN or zero-rate codes) do not apply. Instead, the focus should be on ensuring the invoices clearly support the UAE entity’s economic substance, arm’s length margins, and compliance with corporate tax and transfer pricing rules.
Contracts establish the legal and commercial basis for the UAE entity’s role in the transaction. Customer agreements should clearly reflect that the UAE entity is the contracting or billing party, even though the goods are shipped directly from the supplier to the overseas customer. Supplier or intercompany contracts should define the UAE entity’s role—whether as principal or agent—and document the functions, risks, and margins it assumes. Clear contractual arrangements help substantiate corporate tax and transfer pricing positions and reduce disputes in audits or reviews.
Compliance in a Bill-to-Ship-to model is an ongoing process. Regular reviews should ensure that invoices and intercompany agreements accurately reflect the UAE entity’s role as the billing party, even though goods are shipped directly from the supplier to the final customer.
Quarterly or periodic assessments should verify that corporate tax, transfer pricing, and contractual processes remain effective, properly documented, and aligned with UAE regulations and international tax principles. Consistent monitoring helps maintain defensible margins, supports economic substance, and prevents discrepancies across jurisdictions.
What documentation and record-keeping are required?
Essential Documents to Maintain for the bill to ship to model:
| Pre-Transaction Setup | During Transaction Processing | Post-Transaction Compliance |
|---|---|---|
| Establish a clear tri-party contractual framework. | Issue invoices showing the UAE entity as the billing/contracting party. | Retain all contracts, invoices, and supporting documents for 8 to 10 years to comply with UAE Corporate Tax and transfer pricing rules. |
| Document the UAE entity’s role, functions, risks, and margins (principal vs. agent). | Maintain clear documentation of marketing, sales strategy, and invoicing activities. | Conduct periodic compliance reviews to ensure margins, roles, and documentation remain consistent and defensible. |
| Implement intercompany agreements and invoice templates reflecting UAE entity’s economic substance | Keep a real-time record of intercompany communications and approvals | Ensure all records support the arm’s-length nature of intercompany pricing and the UAE entity’s substantive role |
The Bill-to-Ship-to model is a practical and widely used approach in trade and logistics, particularly in drop-shipment or job work scenarios. While the concept may appear straightforward, UAE regulations on the place of supply, corporate tax, and documentation require careful planning. By clearly defining roles, documenting the UAE entity’s economic substance, and adhering to intercompany transfer pricing and compliance requirements, businesses can not only maintain regulatory and tax compliance but also optimize operational efficiency.
A well-structured Bill-To-Ship-To arrangement ensures transparent allocation of functions, risks, and profits across jurisdictions, safeguarding businesses during audits and cross-border regulatory and tax reviews.
