The difference between zero-rated and Exempt VAT in the UAE is crucial for businesses to grasp. Value-added tax (VAT) can be categorised into zero rated and Exempt in the UAE. Zero-rated VAT applies to certain goods and services that are taxed at a rate of 0%. While these supplies are technically taxable, the VAT charged is zero. Businesses that provide zero-rated supplies can reclaim the input tax they’ve paid on their expenses, benefiting their cash flow. Common examples of zero-rated supplies include exports and international transport services.
On the other hand, exempt VAT is related to specific goods and services completely free from VAT. Businesses dealing in exempt supplies cannot recover the VAT incurred on their purchases, leading to higher operational costs. This category typically includes certain financial services and residential property rentals.
Understanding the difference between zero-rated and exempt VAT in the UAE is vital for businesses to ensure compliance and effectively manage their tax strategies. In this blog, we will guide you through the differences between zero rates VAT and exempt VAT in the UAE.
Understanding Zero-Rated VAT in the UAE
Zero-rated VAT in the UAE applies to certain goods and services, mainly when exported to a Gulf Cooperation Council (GCC) country that has not yet implemented VAT. This classification includes international transport of passengers and goods and transfers that either originate or conclude in the UAE or traverse any part of its region.
Goods and Services Subject to Zero Rated VAT
According to Article 45 of Federal Decree-Law Number 8 of 2017, 14 categories of goods and services fall under Zero Rated VAT in the UAE:
1. Direct or Indirect Exports
Direct or indirect exports from the UAE to GCC states without VAT are explicitly recognised in the Executive Regulations of this Decree-Law.
2. International Transport
International airfares are classified as zero-rated, as are goods and services involved in transport that starts or ends in the UAE or crosses any part of its region.
3. Air Passenger Transport
Transport of air passengers within the UAE qualifies for zero-rated VAT, provided it is classified as “international carriage” under the Warsaw Convention for the Unification of Certain Rules Relating to International Carriage by Air (1929).
4. Supply of Air, Sea, and Land Transport
The supply of air, sea, and land vehicles intended for transporting passengers and goods is also exempt from VAT.
5. Goods and Services for Transport Operations
Goods and services related to the operation, repair, maintenance, or conversion of transportation means fall under the zero-rated category.
6. Rescue Aircraft and Vessels
Aircraft and vessels designed for rescue operations by air or sea are zero-rated.
7. Supply of Goods and Services During Transport
Goods and services consumed on board any means of transport and any associated installations or additions are included in this zero-rated classification.
8. Investment in Precious Metals
The supply or import of investment-grade precious metals is recognised under zero-rated VAT in the UAE, with the Executive Regulations detailing classification criteria.
9. Residential Buildings
The sale or lease of residential buildings within their first three years of completion may qualify for zero-rated VAT, as specified in the Executive Regulations.
10. Charitable Building Supplies
The first supply (sale or lease) of buildings designated for charitable use is zero-rated.
11. Conversion of Non-Residential to Residential Buildings
Buildings converted from non-residential to residential status are eligible for zero-rated VAT during their first supply (sale or lease).
12. Oil and Gas
Crude oil and natural gas are also classified under zero-rated VAT.
13. Educational Services
Educational services and related goods for nurseries, preschools, and institutions funded by the federal or local government are zero-rated.
14. Healthcare Services
Preventive and primary healthcare services and associated goods fall under the zero-rated category.
Registration Requirements for Zero-Rated Supplies
Suppliers must register for VAT if their taxable supplies (including zero-rated supplies) exceed AED 375,000 within 12 months or if they expect to surpass this threshold in the next 30 days.
However, a supplier may apply for an exemption from registration if they do not make supplies subject to the standard VAT rate of 5%. If granted this exemption, the supplier must not file regular tax returns and cannot claim input tax credits.
Understanding VAT Exemption in the UAE
VAT exemption refers to certain supplies not subject to VAT, meaning no VAT is charged. Unlike zero-rated supplies, suppliers of exempt supplies cannot claim back the VAT they pay on their business purchases related to these exempt supplies. This means they cannot recover any VAT costs incurred.
List of VAT Exempt Supplies in the UAE
Here are the key categories of exempt supplies in the UAE:
- Local Transportation
Transportation services that occur within the UAE are exempt from VAT.
- Bare Land
The supply of undeveloped land is considered exempt.
- Residential Buildings
Residential properties (excluding those classified as zero-rated) are exempt.
- Financial Services
Financial services such as insurance, life insurance, and reinsurance are exempt unless provided for a fee, commission, or any compensation.
- Tourist Exemptions
Tourists visiting the UAE are exempt from paying VAT on certain purchases. According to the Federal Tax Authority, tourists can reclaim 85% of the VAT they pay in stores across the seven emirates.
VAT Registration for Exempt Supplies
Suppliers who only make exempt supplies do not need to register for VAT. They won’t benefit from VAT deductions since they cannot claim tax credits on their business expenses. For example, renting residential properties is classified as an exempt supply.
Difference between Zero-Rated and Exempt VAT in the UAE
In the UAE’s Value Added Tax (VAT) system, it’s essential to understand the differences between zero rated and Exempt VAT, as they have distinct implications for businesses and consumers alike.
| Criteria | Zero Rated VAT | Exempt VAT |
| Definition | Goods and services are taxed at a VAT rate of 0%. | Goods and services that are not subject to VAT at all. |
| Tax Input Credit | Businesses can reclaim VAT on purchases and expenses related to zero-rated supplies. | Businesses cannot reclaim VAT paid on expenses related to exempt supplies. |
| Impact on Cash Flow | Improves cash flow as businesses can recover VAT, leading to potential refunds. | This may increase overall costs as businesses absorb VAT without offsets. |
| Compliance Requirements | Businesses must maintain records of zero-rated supplies for VAT filing. | Businesses must also keep records of exempt supplies but refrain from reporting VAT on these supplies. |
| Examples | – Exports of goods and services – Certain healthcare services – Educational services (certain cases) – International transport of passengers and goods | – Financial services (e.g., loans, insurance) – Residential property rentals – Certain educational services (e.g., non-registered institutions |
| VAT Return Reporting | Zero-rated supplies must be reported in VAT returns and contribute to VAT filings. | Exempt supplies are reported separately but do not affect overall VAT liability. |
| Industry Impact | Encourages exports and supports sectors where recovery of input VAT is crucial. | It often impacts sectors like finance and real estate, leading to increased operational costs. |
| Relevance to Consumers | Consumers may benefit indirectly from lower prices due to businesses recovering VAT. | Consumers may face higher prices as businesses cannot recover VAT, increasing costs passed on to them. |
| Objective | Zero-rated VAT aims to promote exports and certain essential services | Exempt VAT generally applies to specific sectors to avoid taxing necessities. |
| Financial Implications | Zero-rated supplies can enhance liquidity for businesses | Exempt supplies can burden them with additional costs. |
This table clearly distinguishes between zero-rated and exempt VAT in the UAE.
How can Shuraa tax help?
In conclusion, knowing the difference between zero-rated and exempt VAT in the UAE is essential for businesses. Zero-rated VAT allows companies to recover the tax they pay on their expenses, which can improve cash flow.
In contrast, exempt VAT means businesses cannot recover tax, leading to higher costs. Understanding these differences helps businesses manage their taxes better.
If you need help managing these VAT categories and staying compliant, Shuraa Tax will assist you. Contact us today at +971508912062 or email us at info@shuraatax.com.
Frequently Asked Questions
Q1. What is the Zero rate?
The zero rate means goods are VAT taxable, but the rate is 0%. You must record these supplies in your VAT account and report them on your tax return.
Q2. What is Exempt?
Exempt supplies are not taxable, and no VAT is charged. Suppliers cannot recover VAT on expenses related to making these supplies.
Q3. What are Zero-rated supplies?
These include exports, international transport, first sale/rent of residential buildings, specific healthcare and educational services, and more as per Article 45 of the VAT law.
Q4. What are exempt supplies?
These include financial services, residential buildings (not zero-rated), bare land, and local passenger transport, as listed in Article 46 of the VAT law.
Q5. Do suppliers of Zero-rated and Exempt supplies charge VAT?
No, suppliers do not charge VAT on these supplies.
Q6. Do I need to file returns if I only supply Zero-rated supplies?
Yes, unless exempt from registration, you must file returns and can recover input tax on business purchases.
Q7. Who are the suppliers of Zero-rated supplies?
Exporters, real estate developers, airlines, schools, hospitals, etc.
Q8. If I make exempt supplies, do I need to register?
No, if all supplies are exempt, you don’t need to register for VAT and cannot recover input tax. Examples include property owners renting for residential purposes
