What are VAT Exemptions in the UAE?

Value Added Tax (VAT) is a consumption tax levied on goods and services at each stage of the supply chain. It was introduced in the United Arab Emirates (UAE) on January 1, 2018, as part of the GCC (Gulf Cooperation Council) countries’ agreement to diversify their revenue sources. The standard VAT rate in the UAE is currently set at 5%.

One important concept to understand when it comes to VAT in the UAE is exemptions. VAT exemptions in UAE refer to goods and services not subject to VAT. This is different from zero-rated supplies, which are still taxable at 0% but are considered outside the scope of VAT.

Understanding the difference between exemptions and zero-rated supplies is crucial for both businesses and consumers in the UAE.

What is VAT & How is it Calculated in the UAE?

VAT stands for Value Added Tax. It’s a tax levied on the consumption of goods and services in the United Arab Emirates. The standard VAT rate in UAE is 5%. This applies to most goods and services sold within the country. However, there are exceptions: 

1. Zero-rated supplies: These goods and services have a VAT rate of 0%. This includes exports outside the GCC (Gulf Cooperation Council) countries, international transportation, certain educational and healthcare services, and the first supply of residential property. 

2. Exempt supplies: These goods and services are not subject to VAT at all. This includes financial services, local passenger transport, and bare land supply. 

Here’s how VAT is calculated in the UAE:

VAT amount = Price of good or service x VAT rate (5%)

For instance, let’s say a product costs AED 100. To calculate the VAT amount, you would do:

VAT amount = AED 100 x 5% = AED 5

The VAT amount in this case would be AED 5.

Total price with VAT = Price of good or service + VAT amount

Following the example above, the total price with VAT would be:

Total price = AED 100 + AED 5 = AED 105

So, the final price you pay for the product would be AED 105, which includes the AED 5 VAT.

What are Exempt Supplies in UAE VAT?

VAT exemptions in UAE apply to certain categories of goods and services, meaning you won’t pay the standard 5% VAT on them. This can be beneficial for both businesses and consumers, reducing the overall cost of certain transactions.

Common VAT Exemption list in UAE

Here is the list of Exempt Supplies in UAE:

1. Specific Financial Services

Specific financial services outlined in the UAE VAT legislation are exempt. This typically excludes services with explicit fees or commissions, such as bank charges, money transfers with fees, or investment management with fees.

2. Residential Buildings (with conditions)

Generally, the supply of residential properties is exempt from VAT. This helps ensure VAT isn’t an extra cost for those buying their own homes. There are specific rules for situations beyond the first supply, so it’s best to consult the authorities for details on resale or rentals.

3. Bare Land

The supply of bare land, meaning land without any buildings on it, is exempt from VAT.

4. Local Passenger Transport

Transportation services for passengers within the UAE, by land, water, or air, are exempt from VAT. This includes taxis, buses, trains, trams, ferries, and similar means of transport. 

Zero Rated vs Exempt VAT in UAE

Taxable vs. Non-Taxable:

Zero-Rated: These are still considered taxable supplies, but the VAT rate is 0%. Businesses registered for VAT can claim input tax credit on their purchases related to zero-rated supplies. (Think of it as getting a VAT refund on expenses related to the zero-rated product or service).

Exempt: These are not considered taxable supplies at all. VAT is simply not applicable. Businesses cannot claim input tax credits on expenses related to exempt supplies.

Reason for Exemption:

Zero-Rated: Often used to promote exports or specific industries. Examples include exports outside the GCC, international transportation, certain educational and healthcare services.

Exempt: Typically used to make essential services more affordable or avoid complexities in specific sectors. Examples include specific financial services, local passenger transport, and bare land.

Both Zero-Rated and Exempt supplies need to be reported in your VAT return, even though no VAT is charged. This helps authorities track the movement of these goods and services.

Key Difference Between Zero-rated Vs Exempts

Partial VAT Exemption

A partial exemption is a situation where a business makes a supply that includes both taxable and exempt elements. For example, you run a company that sells educational kits (exempt from VAT) along with stationery items (taxable at 5% VAT) in a single package. This would be considered a partially exempt supply.

You can’t simply slap a 0% VAT rate on the entire package. You need to calculate the taxable portion (stationery) and the exempt portion (educational kit) and apply VAT accordingly. This process is called apportionment.

The UAE allows businesses to use different apportionment methods approved by the Federal Tax Authority (FTA). This includes:

• Input Tax Method (Standard)
• Output-Based Method
• Transaction Count Method
• Floorspace Method
• Sectoral Method

How to Apply for VAT Exemptions in the UAE

If your business activity falls under the categories outlined in the UAE VAT Act and Executive Regulations (financial services, residential buildings, bare land, local passenger transport), the exemption applies automatically. You don’t need to register or apply for anything specific.

However, it’s your responsibility to ensure your business activities qualify for the exemption and maintain proper records to support this in case of an audit by the Federal Tax Authority (FTA). These records should clearly demonstrate why a supply was exempt from VAT.

Audits and VAT Exemption

During a VAT audit in the UAE, VAT exemptions can be a point of focus for the Federal Tax Authority (FTA) to ensure you’re complying with regulations.

The FTA will thoroughly examine your records to verify that the supplies you claim as exempt genuinely qualify for the exemption under the UAE VAT Act and Executive Regulations. Therefore, maintaining records for your exempt supplies is crucial.

Record-keeping for VAT Exemptions in UAE

The UAE VAT law mandates businesses to maintain proper records to support their VAT treatment, including exemptions. This helps demonstrate the validity of claimed exemptions during a potential tax audit by the Federal Tax Authority (FTA).

What records to keep?

• Copies of all invoices and receipts related to exempt supplies.
• Import/Export Documents (customs documents, bills of lading, and any relevant permits)
• Contracts and agreements with suppliers or customers
• Internal Records (sales records or inventory management systems)
• Supporting Documents (licenses, certificates, or official communications)

If the FTA finds discrepancies or missing documentation regarding your exempt supplies, you could face penalties. These can range from warnings and fines to having to pay VAT on previously claimed exempt supplies, along with potential interest charges.

Shuraa Tax – Your Total UAE VAT Solution

Understanding VAT exemptions in the UAE is essential for both businesses and consumers. Key VAT exemption list in UAE include healthcare services, educational services, certain real estate transactions, financial services, and local passenger transport. Each category has specific rules that need to be followed to qualify for the exemption.

Because VAT regulations can be complicated sometimes, it’s a good idea to consult with a tax professional. At Shuraa Tax, our team is ready to help with all your tax and accounting needs. Our tax consultants in Dubai will look at your current financial situation and help plan your taxes and bookkeeping.

Shuraa Tax offers the best VAT consultancy services in Dubai, including filing VAT returns, giving VAT advice, and helping with everything related to UAE VAT implementation. So, talk to our expert today at +971508912062 or info@shuraatax.com.

Let our experts make sure your business stays compliant and financially healthy.