Most new businesses in the UAE have many misconceptions about the VAT rules. Most importantly, they cannot differentiate between the different categories of supplies. Understanding supply classification helps you apply UAE VAT rules with accuracy. Each category affects whether you charge VAT, recover input VAT, or include the value of the supply in your registration review. The VAT Law and the Regulation give clear conditions for each type of supply, so you need to match every transaction to the correct treatment before filing returns or planning your record keeping.
For a transaction to be within the scope of UAE VAT, it must generally be a taxable supply, occur in the UAE, be made by a taxable person, and be conducted in the course or furtherance of any business carried on by that person. Supplies are broadly categorized into taxable supplies (which includes standard rated and zero rated), exempt supplies, and supplies outside the scope of VAT.
I. Taxable Supplies (Standard Rated and Zero Rated)
A taxable supply is defined as a supply of goods or services made for consideration during the course of business by any person in the UAE, excluding exempt supplies.
Standard Rated Supplies (5%)
The standard rate in the UAE is 5%. Unless a supply is specifically covered by provisions relating to zero-rated or exempt supplies, it will be standard-rated by default, provided it is made by a taxable person and falls within the scope of VAT.
Examples of standard-rated supplies include many common goods and services such as food, clothing, machinery, hotel accommodation, and most insurance and related services. Additionally, deemed supplies (transactions treated as taxable supplies even when no consideration is received), such as the private use of business assets or goods held upon deregistration, are subject to VAT at the standard rate unless specific exceptions apply.
Zero Rated Supplies (0%)
Zero-rated supplies are taxable supplies subject to VAT, but at a rate of 0%. A critical distinction is that a taxable person making zero-rated supplies is typically entitled to recover the input VAT incurred in making those supplies. Zero-rated supplies are included in the VAT registration threshold calculation.
Key categories of supplies subject to the zero rate (0%) include:
- Exports of goods and services from the UAE to outside the UAE, provided all relevant requirements are met.
- International transport services of goods and passengers, and related goods and services.
- Investment precious metals (gold, silver, and platinum) if they meet conditions regarding purity (99% or more) and form (tradeable in global bullion markets).
- The first supply of residential buildings within three years of completion.
- Crude oil and natural gas supplies and imports.
- Certain basic and preventative healthcare services supplied to natural persons and related medications/medical equipment specified by a Cabinet Decision.
- Certain educational services and related goods for recognized institutions owned or funded primarily by the federal or local government.
II. Exempt Supplies
Exempt supplies are supplies of goods and services on which VAT is not imposed. Crucially, a person who makes exempt supplies is not eligible to recover any input VAT incurred in making those supplies. If a business makes both taxable and exempt supplies, it is considered partially exempt and generally cannot recover all input tax. Exempt supplies are explicitly not included when calculating the VAT registration threshold.
The VAT Law lists specific categories of supplies that are exempt:
- Certain Financial Services: Financial services are exempt insofar as they are remunerated by way of an implicit margin (i.e., no explicit fee is charged). This generally includes interest as consideration for a debt security. The issue, allotment, or transfer of ownership of equity securities or debt securities (such as stocks) is also exempt. Fees charged for the explicit operation of a bank account, money transfers, or currency exchange typically remain taxable.
- The Supply of Residential Buildings through sale or lease, except for supplies that qualify for zero-rating. The granting of a lease for more than six months, or to a tenant who holds an EID card, is generally exempt, provided it is not zero-rated.
- Bare Land.
- Local Passenger Transport Services.
III. Supplies Outside the Scope of VAT
Supplies considered outside the scope of VAT are transactions that do not meet the core conditions required to fall under the UAE VAT legislation. Since they are not considered a “supply” for VAT purposes, no VAT consequences arise. These supplies are excluded from the calculation of the VAT registration threshold.
Examples of transactions treated as outside the scope of VAT include:
- Transfer of a Business as a Going Concern (TOGC): The transfer of a whole or independent part of a business is not considered a supply if the transfer is made to a taxable person who intends to continue the business.
- Intra-group Transactions: Supplies made between members of a VAT group are generally disregarded for VAT purposes.
- Compensation and Donations: Most compensation payments are outside the scope of VAT. Donations, grants, and scholarships are outside the scope if given without any express or implied benefit in return.
- Passive Investment Income: Income such as passively earned interest from bank deposits or dividend income received merely by holding shares in a company does not constitute consideration for a supply and is outside the scope of VAT.
- Employee Services: Services provided by employees to their employer are not within the scope of VAT.
- Disbursements: The recovery of payments made by a taxable person strictly on behalf of another party (a client) is treated as a disbursement and is outside the scope of VAT.
In summary, proper VAT treatment requires a meticulous review of both the nature of the supply and the specific conditions set out in the UAE VAT Law and Regulations to determine the appropriate classification and subsequent VAT obligations and rights.
This material provides general information only. It does not replace professional advice. Tax rules depend on specific facts, so you should review the VAT Law, the Regulation, and any relevant decisions before taking action. No liability arises from using this information.
