Value Added Tax (VAT) has been a key part of the UAE’s tax framework since January 1, 2018. While most goods and services are taxed at the standard rate of 5%, there are important categories that either enjoy UAE VAT exemptions or are zero-rated. If your business provides or deals with VAT exempt supplies—or you are unsure whether a supply is exempt or zero rated—you need clear, up-to-date guidance.
At My Taxman, we specialise in helping businesses navigate VAT, corporate tax, transfer pricing, accounting, and more. In this article, we’ll explain the VAT exemption UAE rules, provide a VAT exempt supplies list, clarify the difference between exempt and zero rated VAT in UAE, including recent updates, implications for businesses, and plenty of examples. If you want personalised guidance, call us now at +971-543223140.
Definitions
- VAT Exempt Supplies / VAT Exemption UAE
- Exempt supplies are those goods or services that are outside the scope of VAT. That means no VAT is charged on these supplies, and the supplier cannot recover input VAT (i.e., VAT paid on purchases, expenses) related to those supplies.
- Zero-Rated VAT Supplies
- Zero-rated supplies are technically still taxable supplies, but with a VAT rate of 0%. The supplier charges 0% VAT (so the customer pays no VAT) but can recover input VAT on expenses linked to those supplies.
Why the Distinction Matters
- Input Tax Recovery: If you supply zero-rated items, you may claim credits for input VAT; exempt supplies do not allow that.
- VAT Registration Thresholds & Obligations: Zero-rated supplies count toward taxable turnover; exempt supplies generally do not.
- Pricing & Profitability: Because input VAT on exempt supplies is unrecoverable, it becomes part of cost; this may affect your pricing, contracting, margins.
- Compliance Risk: Misclassifying supplies can lead to fines, audits, or incorrect VAT filings.
UAE VAT Exemptions: Legal Basis & Recent Updates
- Governing Legislation: UAE Federal Decree-Law No. (8) of 2017 on Value Added Tax, plus its Executive Regulations.
- Relevant Articles:
- Article 45 lists zero-rated supplies.
- Article 46 covers exempt supplies.
- Thresholds & Registration: Mandatory VAT registration applies when taxable supplies (including zero-rated) exceed AED 375,000 over a 12-month period, or are expected to exceed that in the next 30 days.
- Recent Clarifications / Practices:
- The Federal Tax Authority (FTA) has issued guidance clarifying which educational, healthcare, and transport services qualify for zero-rating vs exemption.
- The purity requirement for investment in precious metals.
- Specific time constraints for “first supply” of residential buildings (within 3 years of construction).
List of Zero-Rated Supplies in UAE
Here are categories and examples of supplies that qualify for zero-rating under UAE VAT law:
Category | What is Zero-Rated | Relevant Conditions /Notes |
Exports of goods and services outside the UAE (or to countries outside the implementing GCC VAT states) | Zero-rated | Must have documentation to prove export. |
International transport of goods or passengers, including related supplies | Zero-rated | Also includes supplies for operation/repair/maintenance of the means of transport. |
Educational services / related goods/services provided by government-funded or recognised institutions | Zero-rated | Only certain levels and under specified conditions. |
Preventive & basic healthcare services and related goods / medicines | Zero-rated | Needs to be curative/preventive and under specified approval/licensed. |
First supply (sale or lease) of residential buildings (within 3 years of completion) | Zero-rated | Applies only for new residential; first supply after construction. |
Qualifying charitable buildings / supply for charitable purposes | Zero-rated | If meets requirements under FTA and UAE law. |
Investment grade precious metals (e.g. gold, silver, platinum, meeting purity criteria) | Zero-rated | Must meet purity standards, etc. |
Supply of crude oil & natural gas | Zero-rated | Under Article 45, with related controls. |
List of Exempt Supplies in UAE
Here are supplies that are VAT exempt. Remember: no VAT charged, but also no input VAT recovery.
Category | Examples |
Residential real estate (after first supply) | Sale or lease of residential properties that are not new buildings; existing homes. |
Bare land | Sale / lease of undeveloped land (no buildings/structures) |
Local passenger transport | Buses, taxis, metro, ferries within UAE (local) |
Certain financial services | E.g. interest on loans, life insurance, reinsurance, or those financial services where explicit fees, commissions or similar compensations are not charged. |
Key Differences Between Zero-Rated & VAT Exempt Supplies in UAE
Feature | Zero-Rated Supplies | Exempt Supplies |
VAT rate charged to customer | 0% | No VAT charged |
Input VAT recovery (on business expenses) | Allowed (recoverable) | Not allowed (unrecoverable) |
Inclusion in taxable turnover | Yes | No (unless mixed supplies) |
VAT registration requirement if only zero-rated supplies | Can apply for registration exemption only if no standard-rated supplies; otherwise must register if turnover > AED 375,000. | Businesses only supplying exempt supplies may not need to register. |
Pricing & cost impact | Lower net cost because input VAT recovered, helping margins | Higher embedded cost; need to factor input VAT into pricing |
Compliance & documentation | More stringent, need to show proof, maintain records for zero-rated supplies | Also documentation required, but no input VAT claims to substantiate |
Examples & Case Scenarios
- Real Estate Developer
- If you build a new residential property and sell/lease it for the first time within 3 years of its completion → zero-rated. Later sale, or resale of existing homes → exempt.
- Educational Institution
- A government or government-funded school providing curriculum education: typically zero-rated.
- An extra-curricular club not fully recognised: could be standard-rated or exempt, depending on regulation.
- Financial Institution
- A bank’s interest income on loans → exempt (no explicit fee).
- A fee-based advisory or brokerage service → may be standard rated.
- Transport Services
- International flights or transport of goods leaving UAE → zero-rated.
- Local municipal bus, taxi rides → exempt.
- Precious Metals Trader
- Trading investment grade precious metals meeting criteria → zero-rated, enabling input VAT recovery.
Implications for Your Business
- Cash Flow: If your business is dealing with exempt supplies, you may have cash tied up in input VAT you cannot recover.
- Pricing Strategy: Costs may need to be adjusted upwards to compensate for non-recoverable VAT.
- Accounting & Record Keeping: You’ll need to segregate exempt vs zero-rated vs standard supplies, maintain accurate documentation, possibly handle partial exemption / apportionment.
- Registration Decisions: If your zero-rated turnover pushes you above the AED 375,000 threshold, or if you have mixed supplies, you’ll need to ensure you register correctly and file returns on time.
- Audit & Compliance Risk: Misclassification is one of the most common audit triggers. FTA has issued penalties for incorrect VAT treatment.
How to Determine If a Supply is Exempt or Zero-Rated
- Check Legislation (Articles 45 & 46) to see whether the supply is listed under zero-rated or exempt.
- Check Conditions / Approvals (e.g. recognised educational institutions, licensed healthcare providers, purity of metals, timeframe for “first supply” of residential).
- Consult FTA Guidance – many recent interpretive guidelines are available from the Federal Tax Authority.
- Keep Excellent Records – invoices, contracts, certificates of recognition/licensure, building completion documents etc.
- Get Professional Advice – since misclassification can be costly, businesses often engage VAT specialists.
Best Practices for Businesses Dealing with VAT Exemptions
- Map all supplies you make and categorize into standard rated, zero-rated, and exempt.
- Ensure your accounting / ERP system can track input VAT separately for zero-rated supplies.
- If you make both exempt & taxable supplies, implement partial exemption methods correctly.
- Review contracts, customer invoices, lease agreements etc to confirm whether residential property is “first supply” or “resale”, whether financial service charges are explicit.
- Stay updated on FTA updates, because sometimes certain categories or conditions get clarified or changed.
Conclusion & What You Should Do Now
Understanding UAE VAT exemptions and the difference between exempt vs zero-rated VAT is not just academic—it directly impacts your business’s compliance, costs, profitability, and risk exposure. If you are offering exempt supplies (or think you might be), or you have a mix of supply types, now is the time to get your VAT classification, systems, and pricing strategy thoroughly checked.
At My Taxman, we help businesses like yours with VAT compliance, VAT advisory, transfer pricing, accounting & bookkeeping, and all related tax services. To make sure your VAT strategy is sound, and you are NOT leaving money on the table or exposing yourself to unnecessary risk, call us today at +971-543223140.
Let us assist with:
- VAT classification reviews
- Input tax recovery optimisation
- Registration & de-registration advice
- Audit readiness
We’re here to help you stay compliant, efficient, and profitable.
Frequently Asked Questions (FAQs)
Q1. What is “VAT exemption UAE” vs “VAT exempt supplies list”?
A: “VAT exemption UAE” is a general term referring to the legal status of supplies or transactions that are exempt from VAT, as per UAE VAT law. “VAT exempt supplies list” is a list of goods or services that qualify under that exemption (e.g. financial services, residential real estate post-first supply, bare land, local transport).
Q2. What is the difference between exempt and zero-rated VAT in UAE?
A: Zero-rated supplies are still taxable supplies (you must include them in taxable turnover), but at 0% rate; input VAT on expenses can be reclaimed. Exempt supplies are outside the VAT system; you don’t charge VAT, but you cannot recover input VAT.
Q3. Does being exempt mean I don’t need to register for VAT?
A: If your business only makes exempt supplies, you may not need to register, provided you don’t make any standard-rated or zero-rated taxable supplies and your turnover does not trigger registration. But many businesses have mixed supplies, in which case registration might be mandatory.
Q4. What are some up-to-date zero-rated supplies in UAE?
A: Current zero-rated supplies include exports of goods/services, international transport of goods/passengers, first supply of residential buildings within 3 years, certain educational & preventive healthcare services, investment precious metals and supplies to charitable buildings.
Q5. What are some exempt supplies under UAE VAT?
A: Exempt supplies include post-first supply sale/lease of residential property, bare land, local passenger transport (buses, taxis, metro etc.), and certain financial services with no explicit fees.
Q6. What happens if I misclassify an exempt supply as zero-rated (or vice versa)?
A: Misclassification can lead to FTA audit, disallowed input VAT claims, penalties, requirement to restate / amend VAT returns. It can also mess up pricing and profitability.
