Who is Exempt From VAT in the UAE?

Key aspects of VAT for the purposes of exemptions

Anyone who buys or sells anything in the UAE should be aware of VAT. The final burden falls on the consumer. Entrepreneurs, in turn, are required to collect VAT from their customers on behalf of the Federal Tax Authority and report their compliance. Businesses act as intermediaries between the government and the consumer. So, they can claim back the VAT paid on their inputs on certain conditions.

One of the key aspects of VAT rules is the exemption provision. Before we delve into this concept, let’s review some key terminology.

Input VAT is the tax that a supplier includes in the price when selling goods or services. If the buyer is registered for VAT, they might be able to claim back this tax from the Federal Tax Authority (FTA).

Output VAT is the tax a business adds to the price of the goods or services it sells after registering for VAT.

VAT recovery. Companies can claim back the input VAT if their outputs are taxable. However, businesses that make exempt supplies cannot reclaim.

The VAT amounts charged and the recoverable input tax by a business need to be balanced (input tax and output tax) in the tax return. The difference is the net VAT amount, which is either paid to or refunded by the Federal Tax Authority. This is known as the net VAT position.

VAT Rates

Standard rate (5%): Established by the government for most goods and services.

• Example: A local electronics store sells a laptop for AED 5,000. The store charges a 5% VAT on the sale, adding AED 250 in tax, so the total price the customer pays is AED 5,250.

Zero-rated supplies: The rate is 0%, but businesses can recover the VAT paid on their inputs.

• Example: A medical equipment supplier exports diagnostic machines to a hospital in another country. The export is taxed at 0%, meaning no VAT is charged, but the supplier can still reclaim the VAT paid on inputs (e.g., parts purchased for assembling the machines).

Exempted supplies: No VAT is charged, and companies cannot get back input VAT.

• Example: A real estate company rents out residential apartments. Because residential rentals are exempt from VAT, the company does not apply it to the rent. However, it is unable to recover the input VAT on goods and services connected to the rental business (e.g., maintenance services).

Out-of-scope supplies: Transactions that occur outside the scope of UAE VAT law, such as supplies made outside the UAE.

• Example: A UAE-based consulting firm provides services to a company in Singapore. Since the service is delivered entirely outside the UAE, it is considered an out-of-scope supply and not subject to VAT in the UAE.

VAT exemption explained

It is important to be aware of VAT exemptions to ensure compliance with UAE regulations and to manage tax obligations effectively. This can help reduce costs for both businesses and consumers, easing their overall financial burden.

Zero-rated supplies vs exempt supplies

Why is it important to be aware of VAT exemptions?

Knowing about VAT exemptions in the UAE can have several advantages:

1. Reduce tax burden: If you supply exempt products or services, you won’t charge VAT on them, potentially lessening your tax liability.
2. Save money: You can optimize tax planning and avoid unnecessary payments by understanding which supplies are exempt or zero-rated.
3. Align with UAE laws and avoid penalties: Non-compliance can lead to penalties, so staying informed helps you avoid costly fines.
4. Clarity in payments: Being aware of which transactions are taxable ensures you only pay what is necessary and helps prevent incorrect charges.

As a business owner in the UAE, you must also comply with corporate tax laws, including registering with the tax authority by the set deadline. Ensuring accurate tax calculations and timely filing of corporate tax returns will help you avoid penalties and fines.

Exempted sectors

Several sectors in the UAE are entirely or partially exempt from VAT. Here are the supplies that are found in the VAT exemption list:

Financial services. Many financial services are exempt, particularly those not involving an explicit fee, such as interest on loans.

Example: A bank in the UAE provides a customer with a personal loan. The interest charged on the loan is considered part of the financial service. Since no additional fee (such as a processing fee or service charge) is involved, the interest payment is exempt from VAT.

However, if the bank charges a fee for services like loan processing or account maintenance, these specific fees would be subject to VAT, as they represent explicit charges separate from the core financial service (the loan itself).

Residential buildings. The sale and lease of residential property is VAT-exempt after the first supply.

Example: A developer constructs a residential apartment building in Dubai and sells the individual units.

When the developer sells the first unit of the apartment, this transaction is subject to VAT at 5%. The developer collects VAT from the buyer and remits it to the government.

After the first sale, any subsequent sales of the same residential unit (for instance, if the buyer decides to sell the apartment to another individual) are exempt from VAT. This means that the new buyer does not pay VAT on the purchase price of the apartment.

If the developer decides to lease out some of the units after selling a few, the leases of residential properties are also exempt from VAT. For instance, if the developer rents an apartment to a tenant after selling several units, the rental payments collected from the tenant are not subject to VAT.

Bare land. Undeveloped land leased or on sale is exempt from VAT.

Example: A property developer is interested in purchasing a large plot of undeveloped land in Dubai to construct a residential community.

The developer negotiates with a landowner for the sale of the bare land, which is defined as land that has not been built upon or developed in any way.

The landowner does not need to charge VAT on the sale price, allowing for a more straightforward transaction without the additional tax burden.

Local passenger transport. Public transportation, including buses and taxis, is VAT-exempt.

Example: A taxi company operating in Dubai provides rides for passengers throughout the city. The fares charged to passengers do not include VAT.

Tourism. Certain specific services for tourists, such as local passenger transport, can also be exempt from VAT.

Example: A local tour operator offering guided tours of attractions like the Louvre Abu Dhabi or the Burj Khalifa may provide services that are exempt from VAT, especially if these services are tailored for tourists. This exemption helps keep tour prices competitive.

Partial VAT exemption

Partial exemption happens when a business provides both taxable and exempt supplies. In such cases, the company can only recover input VAT on purchases connected to its taxable operations.

The process for determining how much VAT can be reclaimed can be complex, requiring careful calculation based on the proportion of taxable and exempt supplies.

Non-eligibility for input VAT recovery

Some supplies, even though taxable, cannot have their input VAT recovered. These include:

• Goods or services when used for non-business purposes.
• Entertainment expenses, such as meals or leisure activities for staff.
• Motor vehicles that are used for personal purposes.

How to apply for the exemption

Applying for VAT exemption in UAE involves a few key steps:

1. Documentation: You’ll need to provide evidence to support your exemption claim, including details about the goods or services, contracts, and VAT invoices.
2. Submission: The application is typically done through the FTA portal, where you need to submit your supporting documents and explanation.
3. Approval: VAT exemption approval can take some time, but the FTA aims to respond within a reasonable period. Always ensure your documents are correct to avoid delays.

To ensure a smooth VAT compliance process, consider seeking advice from business and tax experts in Dubai. Their guidance can help make your VAT obligations easier to manage, giving you confidence and reducing potential hassles.

Record-keeping requirements

Businesses that claim VAT exemptions must maintain detailed records, including invoices, contracts, and accounting information. The timeframe for keeping records is no less than 5 years. This is crucial for proving eligibility for VAT exemption and for staying compliant with FTA regulations. Poor record-keeping can result in penalties during an audit.

Records to maintain:

• Keep copies of all invoices related to exempt supplies, including any applicable terms and conditions.
• Retain contracts that outline the nature of the exempt services or goods.
• Maintain detailed sales records that demonstrate the percentage of exempt and taxable supplies.
• Ensure that all filed tax returns accurately reflect exemption claims and include supporting documentation.

VAT exemptions and audits

The FTA regularly conducts audits to ensure that businesses are complying with VAT regulations. If you’re claiming exemptions, be prepared to provide detailed records to justify your claim. Non-compliance or errors in exemption claims can lead to hefty fines and penalties.

Consequences of non-compliance with VAT exemption rules

Failing to comply with VAT exemption rules can result in significant penalties. Common violations include incorrect claims for VAT exemptions, failure to maintain proper records, and not adhering to filing deadlines.

Fines and penalties: These penalties can range from AED 500 to AED 50,000 or more, depending on the severity of the infraction. For example, incorrect exemption claims may lead to a fine of 50% of the tax amount due, or even 100% for repeated non-compliance.

Reassessment of VAT liabilities: This could result in additional tax owed, along with any accrued interest on late payments, further straining a company’s finances.

Business reputation: Non-compliance can damage a business’s reputation, leading to loss of customer trust and potential partnerships. Clients and suppliers may be hesitant to engage with a company known for tax-related issues, which can impact long-term growth.

Emirabiz expert guidance on VAT exemptions

Navigating VAT exemptions can be complicated, but expert advice can make the process easier. Emirabiz offers specialized consulting services, tax and accounting services to help you understand the nuances of VAT exemptions in the UAE. Whether you’re applying for an exemption or need help with compliance, our team is here to guide you every step of the way.