Zero-rated and exempt supplies

The essential difference between zero-rated and exempt supplies is that businesses selling zero–rated goods or services can recover any VAT incurred on business expenses, while businesses selling exempt goods cannot recover their input VAT.

UAE VAT rates

There are two VAT rates applicable in the UAE:

• The standard rate of VAT (5%) which is applicable to standard rated goods & services
• The zero rate of VAT (0%) which is applicable to zero-rated goods & services

Both standard rated and zero-rated supplies are “Taxable Supplies” which are goods or services supplied for a consideration by a person conducting business in the UAE, and does not include “Exempt Supplies”.

Standard-rated supplies

Standard-rated supplies represent most of the goods and services, while zero-rated supplies are specifically listed in the UAE VAT legislations.

Zero-rated supplies

Zero-rated supplies are goods & services accounted for at a VAT rate of 0%, however, such supplies are still treated as “taxable supplies” in all other respects. Subsequently, a business supplying zero-rated goods or services has the right to recover the VAT incurred on their own business expenditure in the same way as they would if they made standard-rated supplies.

List of zero-rated supplies:

• Exports of goods/services to non-GCCs VAT-implementing states
• Supply of gold, silver, and platinum as an investment
• First supply of residential building (sale or rental)
• Education (basic fees and books)
• Preventive and basic healthcare services and related goods and services
• International transport of passengers and goods
• Goods and services consumed or used during the international transportation of goods or passengers
• The first supply of a building specifically designed to be used by charities.
• Crude oil and natural gas.
• Air, sea and land means of transport intended for the transportation of passengers or goods

Exempt supplies

No VAT is charged in respect of exempt supplies, and they are not “taxable supplies” which mean that the supplier cannot recover the VAT incurred on expenses related to exempt supplies.

List of exempt supplies

• Financial services: exchange of currency, LC, debt security, equity security, loan, operation of deposit or saving AC, dividend.
• Residential building (other than the first supply)
• Bare land
• Local transport (public)

If I sell zero-rated supplies, do I need to register for VAT?

Yes, you need to register. In calculating the VAT registration threshold you must include zero-rated and standard rated supplies.

However, you can apply for an exception from registration if, and only if, you only make zero-rated supplies and do not make any other supplies which are taxable at the standard rate of 5%. If your application is approved, then you will not submit regular tax returns and you will not be able to recover input VAT incurred on business expenses.

Do I need to file returns if I only supply zero-rated supplies?

If you do not qualify for an exception from registration, then you must file tax returns with the FTA. You will also be entitled to recover VAT input tax incurred on business purchases and expenses.

If I make exempt supplies, do I need to register?

If all the supplies you make are exempt, you do not have to register for VAT. In such a case, you cannot recover tax incurred on business purchases.

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