In the UAE, both zero-rated and exempt supplies are sold without VAT, but they are not the same. Zero-rated supplies are taxable at 0%, so the business can recover the VAT it pays on related costs. Exempt supplies are not taxable, so the business can't recover VAT on the costs of making them. The standard VAT rate is 5%.
Source: Ministry of Finance
Zero-Rated vs Exempt: The Difference
| Zero-rated | Exempt | |
|---|---|---|
| VAT charged to the customer | 0% | None |
| Is it a taxable supply? | Yes | No |
| Can you recover VAT on related costs? | Yes, under the normal rules | No |
| Counts towards the VAT registration threshold? | Yes, as a taxable supply | No |
| Shown on the VAT return? | Yes | Yes, in the exempt box |
Source: UAE Government guidance on zero-rated and exempt supplies
Zero-Rated Supplies (0% VAT)
- Exports of goods and services outside the GCC
- International transport of goods and passengers, and related supplies
- Certain means of transport, such as aircraft, ships, trains and trams
- Aircraft and vessels used for rescue at sea or by air
- Certain investment-grade precious metals, such as gold and silver of 99% purity
- New residential buildings, on the first supply within three years of construction
- Certain education services, and related goods and services
- Certain healthcare services, and related goods and services
Source: Ministry of Finance | UAE Government guidance
Exempt Supplies (No VAT)
- Certain financial services, including life insurance and life reinsurance
- Residential buildings, other than those that are zero-rated
- Bare land
- Local passenger transport
Source: UAE Government guidance
Why the Difference Matters: VAT Recovery
If your business only makes exempt supplies, you can't recover the VAT you pay on costs. If you make both taxable and exempt supplies, you must split (apportion) the VAT on shared costs. The Ministry of Finance says the standard method uses the ratio of recoverable input tax to total input tax, and other fair methods can be agreed with the Federal Tax Authority.
Source: Ministry of Finance
Examples
| Supply | Treatment |
|---|---|
| Selling goods to a customer outside the GCC | Zero-rated |
| An international flight ticket | Zero-rated |
| Selling a newly built flat for the first time | Zero-rated |
| Renting an existing residential flat | Exempt |
| Selling bare land | Exempt |
| A local bus or metro fare | Exempt |
| Renting an office | Standard rate (5%) |
Registration and Returns
Zero-rated sales are taxable supplies, so they count towards the AED 375,000 mandatory threshold. Exempt sales don't. A business that only makes zero-rated supplies should check its registration options with the FTA. See our VAT registration guide and voluntary VAT registration guide.
Report zero-rated and exempt sales in the correct boxes of your VAT return. See our VAT return guide.
Frequently Asked Questions
What is the difference between zero-rated and exempt VAT in the UAE?
Zero-rated supplies are taxable at 0%, so you can recover VAT on costs. Exempt supplies aren't taxable, so you can't recover VAT on the costs of making them.
Is residential rent subject to VAT in the UAE?
Residential buildings are generally exempt. The first supply of a new residential building within three years of construction is zero-rated.
Are exports zero-rated in the UAE?
Yes. Exports of goods and services outside the GCC are zero-rated.
Do zero-rated sales count towards the VAT registration threshold?
Yes, because they are taxable supplies. Exempt sales don't count.
Is commercial rent exempt?
No. Exempt property supplies cover residential buildings and bare land, so commercial property is taxed at the standard 5% rate.
Note: This article provides general information only and is not tax advice. Confirm the current requirements with the Federal Tax Authority or a qualified tax professional.