Zero Rated vs. Exempted VAT Supplies in UAE: A Complete Guide

The UAE brought in Value Added Tax in 2018 and businesses need to follow different VAT rules based on the type of goods or services they offer. The standard VAT rate is 5 percent but not all supplies fall under this rate. Some supplies are taxed at 0 percent and others are completely exempt from VAT.

Zero-rated and exempt supplies may look the same because both have a 0 percent rate but they follow different rules. These rules affect VAT registration and tax return filing and input tax recovery.

This blog explains the difference between zero-rated and exempt supplies and shows where each one applies.

What is Zero-Rated VAT?

Zero-rated VAT applies to supplies that are taxable under UAE law but charged at a 0% rate. These supplies are still within the VAT system, so businesses must record them and report them in their VAT returns.

    Note: Even though the VAT charged is 0%, the supply remains taxable. Businesses can still recover input tax on related expenses if they meet the standard VAT recovery rules.

The categories listed below are examples of zero-rated supplies:

• Export of goods and services outside the GCC
• International transportation of passengers or goods
• Supply of qualifying means of transport such as aircraft, ships, or trains
• First sale or lease of new residential buildings within three years of completion
• Supply of aircraft or vessels used for rescue or emergency operations
• Supply of investment-grade precious metals such as gold, silver, or platinum with at least 99 percent purity
• Curative and preventive healthcare services including related goods and medicines
• Educational services provided by government-recognized institutions along with related goods and services
• Supply of buildings used for qualifying charitable purposes

VAT Registration and Exemption for Zero-Rated Supplies in UAE

VAT Registration Requirement

A business must register for VAT in the UAE when:

• Taxable supplies including zero-rated go over AED 375,000 in the past 12 months

• Expected taxable turnover crosses AED 375,000 in the next 30 days
  This requirement applies to all taxable supplies whether the VAT rate is 5 percent or zero percent.

  Exemption for Zero-Rated Supplies

If a business supplies only zero-rated goods or services and does not make any standard-rated taxable supplies then it can request an exception from VAT registration by submitting an application to the Federal Tax Authority (FTA).

Conditions and Implications

If the FTA approves the exemption:

• The business will not register for VAT
• It will not file VAT returns
• It cannot claim input VAT on its purchases and expenses

Note: This exemption applies only when all supplies qualify as zero-rated.

What is VAT Exempt?

VAT exempt applies to supplies that do not fall under the scope of taxable supplies in the UAE. These supplies are outside the VAT system, which means businesses do not charge VAT on them and do not include them as taxable supplies in their VAT returns.

    Note: Since exempt supplies are not taxable, businesses cannot recover input tax on related expenses. 

The categories listed below are examples of VAT exempt supplies:

• Financial services where no explicit fee is charged, such as interest on loans
• Residential property rentals, excluding commercial properties
• Local passenger transport, including services provided by buses and taxis
• Bare land, meaning undeveloped land with no buildings or structures

Key Differences: Zero-Rated vs. Exempt

Zero-rated and exempt supplies may both involve a 0 percent VAT rate, but their treatment under UAE VAT law is very different. In the table below, we provide a summary of the key differences between these two classifications.

Aspect	Zero-Rated Supplies	Exempt Supplies
VAT Rate	0 percent	0 percent
Tax Status	Taxable supply	Non-taxable supply
Input Tax Recovery	Required if threshold is met	Not required if dealing only in exempt supplies
VAT Return Filing	Required	Not required unless dealing in mixed supplies
Impact on Pricing	Lower cost as input VAT can be reclaimed	Higher cost as input VAT is a business expense
Examples	Exports, healthcare, education	Residential rent, financial services, bare land

Industry Classification

VAT in the UAE depends on what a business supplies. Some sectors follow the 5 percent rate. Others fall under the zero percent rate or are fully exempt.

The table below explains how VAT applies to key sectors in the UAE.

 

Industry or Activity	VAT Rate	Classification
General goods and services	5%	Standard-rated
Export of goods and services	0%	Zero-rated
Healthcare (licensed services)	0%	Zero-rated
Healthcare (non-essential services)	5%	Standard-rated
Education (recognized institutions)	0%	Zero-rated
Education (unrecognized providers)	5%	Standard-rated
First sale of new residential buildings	0%	Zero-rated
Residential property rentals	0%	Exempt
Local passenger transport	0%	Exempt
Commercial property sales or rentals	5%	Standard-rated
Precious metals (99 percent purity)	0%	Zero-rated
Financial services (no explicit fee)	0%	Exempt

Conclusion

Zero-rated and exempt supplies may look the same but they are treated differently under UAE VAT law. E-invoicing will soon be mandatory in the UAE so it is important to understand these differences. For more details you can refer to our blogs.