Exempt supplies in UAE are defined as the supply of goods and services where no Value-added Tax (VAT) is charged, and no claim on the related Input tax is allowed except as stated by the UAE decree-law. According to UAE executive regulations, certain goods and services are free from VAT, meaning such goods or services are not subject to VAT and are exempt from VAT charges.
Businesses dealing with the supply of such exempted goods and services cannot claim Input tax related to the exempt supply. Any VAT on expenses related to the exempt supply becomes part of the supplier’s cost.
For example, a company pays 4% of the VAT when purchasing raw materials. Let’s assume the final goods created from that raw material are exempt goods. Since it is an exempt supply, the Company cannot claim the 4% input tax that it paid at the time of purchasing the raw material. Hence, it will become part of the cost of the product.
What are Exempt Supplies in UAE VAT?
Exempt supplies in UAE VAT refer to goods and services not subject to VAT, meaning businesses do not charge VAT on these transactions. However, businesses providing exempt supplies cannot recover the VAT they incur on their purchases related to these supplies.
Exempt supplies include certain financial services, residential properties, and local passenger transport. This means that while these transactions are free from VAT, the businesses involved cannot claim back the VAT on their related expenses.
List of exempted goods and services in the UAE
For goods and services to be exempt, they should be as specified by the UAE’s VAT Law and Executive Regulations. Here is a list of certain VAT-exempted goods and services in UAE which every person dealing in business should know:
1. Financial Services
Financial services are money-centered services. Credit services, loans, insurance, deposits, investments, etc., are all finance-related services. It is important to know that not all financial services are VAT-exempt supplies, and only certain financial services fall under this category.Following are the financial services which are VAT-free:
- There will be no VAT charge on Financial Services not conducted in return for discounts, commissions, explicit fees and rebates, or similar benefits.
- Issuing, allocating or transferring the ownership share in any corporation or entity is VAT-exempt.
- Transferring the ownership of a life insurance contract or provision of reinsurance due to such a contract is VAT-exempt
2. Residential Buildings
Supply of residential buildings is VAT-exempt under the following conditions: –
- Supply of residential buildings which is not zero-rated supply
- If the duration of the lease period as per contract is more than 6 months; or a tenant holds a legal ID proof card issued by the Federal Authority for Identity and Citizenships.
The first supply of residential buildings within three years of completion, or those converted from non-residential to residential as mentioned in the executive regulation on VAT Decree-Law, is zero-rated.
Residential buildings are constructed solely for human inhabitation, such as apartments, student accommodations, police or armed forces, nursing homes, orphanages, etc. Any building not built to accommodate people, such as hospitals, hotels, or serviced apartments, will not be treated as a residential building. VAT will apply to the supply of non-residential buildings.
3. Bare Land
It is empty land with no buildings or other things built or designed. These are VAT-exempt supplies.
4. Local Passenger Transport Services in the UAE
Local passenger transport services in the UAE are exempt from VAT when transporting people within the country by land, water, or air. This includes vehicles like taxis, buses, trains, trams, monorails, ferry boats, abras, and similar means of transport designed for passenger use. Helicopters and aeroplanes approved for passenger transport under the Civil Aviation Act are exempt.
However, pleasure trips and any local passenger transport service by aircraft that constitutes “international carriage” as per UAE executive regulations are not exempt and are subject to a 5% VAT.
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