Everything you need to know about VAT exemption in the UAE
The UAE government brings about changes to the country’s tax systems as per the changing nature of the economy. The introduction of Value Added Tax or VAT in the UAE was a major change for businesses. Those who want to start a business in Dubai (or any other emirate) should have a comprehensive understanding of VAT. But before that, it is important to get familiar with zero-rated and VAT exempt sectors in the UAE to determine your business category. We’ve compiled a helpful guide to VAT exemption in the UAE for aspiring entrepreneurs and business owners who want to start a business.
WHAT IS VAT?
Value Added Tax (VAT) is a form of indirect tax imposed by the government on most services or products. It was introduced on 1st January 2018 at a rate of 5% to help the UAE government reduce dependency on oil and other hydrocarbons as a revenue source.
Under the Federal Decree-Law No. (8) of 2017 on Value Added Tax, the Federal Tax Authority (FTA) categorised VAT into the three segments: the 5% standard rate, exempt and zero-rated.
The standard rate of 5% VAT in the UAE applies to the following categories:
- Entertainment
- Electronics
- Hotel services
- Food and beverages
- Utility bills
- Private transport services
- School uniforms
- Commercial rent
- Cars
- Jewellery and other sectors
Suppliers that produce goods and services within these categories have to register with the FTA and submit a VAT return to the authority at the end of each tax period. This is mandatory for businesses with taxable supplies and imports that exceed AED 375,000 per year. Those with taxable supplies and imports of over AED 187,500 per annum (and below AED 375k) can choose to register for VAT in the UAE.
Please also note that sectors that can apply for zero-rated VAT differ from those eligible for VAT exemption in the UAE. Let’s look at both categories to understand the differences.
DIFFERENCE BETWEEN ZERO-RATED AND VAT-EXEMPT SECTORS IN THE UAE
Here is what you need to know about the difference between zero-rated and VAT exemptions in the UAE.
ZERO-RATED SECTORS IN THE UAE
The zero-rated tax applies to VAT-taxable supplies, but the rate of VAT applied is 0%. Suppliers that produce goods and services with zero-rated tax must register for a VAT account and file tax returns.
According to Article 45 of the Federal Decree-Law no. (8) of 2017, categories that qualify for zero-rated tax in the UAE include:
- Supplies for exports of goods and services for countries outside of the GCC
- International transportation (related supplies)
- Supplies of certain land, air and sea means of transportation (example: aeroplanes and ships)
- Investment-grade precious metals (e.g. gold, silver, of 99% purity)
- Newly constructed residential properties. Have to be supplied for the first time within 3-years of the property construction
- Supply of some education services, relevant goods and services
- Supply of some healthcare services, relevant goods and services
UAE VAT EXEMPT SECTORS
UAE’s VAT exemptions apply to supplies that have been declared as ‘exempt’ from additional taxation. Goods and services suppliers that fall under the VAT exempt categories need not register for VAT in the UAE or file tax returns. For example, rents in Dubai for residential units are included in real estate transactions exempt from VAT.
Here is the complete list of VAT exempt items in the UAE:
- Financial services, including life insurance and reinsurance of life insurance. This also includes financial services that are not conducted for an explicit fee, discount, commission, rebate or similar consideration.
- Residential buildings, other than the residential buildings which are specifically zero-rated.
- Bare land.
- Local passenger transport.
Besides these categories, tourists are also exempt from paying VAT for products they take back home. However, a VAT charge will have to be paid for products they consume during their stay.
PARTIAL VAT EXEMPTIONS IN THE UAE
A VAT-registered individual can incur input tax on some business expenditures in certain situations. This can be recovered entirely if it is related to a taxable supply by the individual. In case when the expenditure is related to non-taxable supply, the individual will not recover the input tax.
In certain conditions, expenditure may be related to both non-taxable and taxable supplies. In such situations, one would have to apportion input tax between the two supply types.
VAT LAW CLARIFICATIONS
In September 2022, President His Highness Sheikh Mohamed bin Zayed Al Nahyan issued the Federal Decree-Law No.18 of 2022. The purpose of this Decree-Law was to amend some provisions of the Federal Decree-Law No. 8 of 2017 on value-added tax (VAT). Here’s a look at the amendments coming into effect from January 1, 2023.
The wording “entry into a contract between two parties” has been replaced with “entry into a contract between two or more parties.” This provides further clarity to Article 5(2), where an agreement was being made between more than two parties.
Similarly, Article 26(1) has also been rephrased. The original law stated that the date of supply does not go over a year from the date of provision of services and goods. Now, it has been rephrased and included as a separate sub-clause 26(1)(d). The purpose is not to change the interpretation of the law.
Another revision has been made to Article 22. When an agent regularly negotiates and enters into an agreement on behalf of the principal or in case the agent maintains goods to fulfil supply agreements for the principal with regularity, that has to be the place of residence of the principal.
ADDITIONS TO THE VAT LAW
Moreover, some additions have also been made to the VAT Law.
As per Article 15, the option of avail registration exceptions has been offered to any registered taxable person who is subject to full zero-rated supplies.
With the addition of Subclause 21(2), the FTA has been empowered to issue a tax deregistration decision if it finds out that the continuity of such tax registration may prejudice the integrity of the tax system.
Furthermore, Article 27(3)(a)(4) has been added. This is in addition to clause 1 of Article 26, which deals with continuous supplies. It outlines that when the transferred in the State, then the place of supply of goods will be in the state.
Another addition is Article 30(8). It explains that the place of supply for transportation or transportation-related services will be where the transportation commences.
Additions made to Article 45 mean that the following items will be considered zero-rated supply:
- Import of means of transportation
- Import of goods and services related to means of transportation
- Import of rescue aircraft or vessels
- Import of crude oil and natural gas
- Import of related basic healthcare goods
- Import of precious metals (if imported for investment purposes)
When pure hydrocarbons are used to produce or distribute any form of energy, reverse charges will apply as per the revised law. Earlier, reverse charges were applied to hydrocarbons instead of pure hydrocarbons. You can read about the top oil and gas companies in the UAE to learn about how they operate.
Businesses have to provide import documents like the bill of entry for the goods and invoices to claim input tax. In these documents are not presented, businesses cannot claim input tax. However, they will still be liable to pay output tax on behalf of non-resident suppliers. This will be under the reverse mechanism charge.
Charities and government entities can claim the entire input tax if they have incurred those expenses for the sovereign activities of government entities and the relevant charitable activities. This comes under the general exception rules; Article 57.
A taxable person individual can adjust output tax post the supply date if the tax has been charged in error. Or if the tax treatment has been applied in error as per Article 69.
As per the VAT law update, registered businesses must issue a tax credit within 14 days from the date it was established to adjust the output tax as per Article 62. Before this change, there was no specific deadline for issuing a tax credit note.
Any individual who receives an amount as tax or issues a tax invoice has to pay such amount to the FTA as per Article 65. Similarly, Article 79, “Statute of Limitation”, has also been updated. This defines the timeline for an FTA audit or for issuing a tax assessment.
FAQS ABOUT VAT EXEMPTIONS IN THE UAE
HOW CAN UAE TOURISTS CLAIM VAT?
VAT refunds for UAE tourists can be claimed at any FTA-approved ”Planet VAT” refund kiosks across the country.
WHICH STATE ENTITY SUPERVISES VAT?
The Federal Tax Authority (FTA) manages and collects federal taxes and issues related fines. It also looks at matters related to VAT exemptions in the UAE.
That completes our guide to VAT exemption in the UAE. We hope you found this information helpful. VAT is just one of the few taxes levied in the UAE.
If you have questions regarding different taxes in the UAE or how to file VAT returns, contact any well-known UAE tax consultants. They have experienced accountants and qualified tax advisors to assist businesses with comprehensive services related to VAT and other types of taxes in the UAE.
