The standard rate of Value Added Tax (VAT) in the UAE is 5%. This was introduced on January 1st, 2018. There are a lot of exceptions from this tax, as certain goods and services are exempt or have a zero rate.
Understanding VAT exemptions is useful for your company. Who is exempt from VAT in the UAE, and how does it affect different businesses - let's talk about it.
VAT Exemption and Differences from Zero-Rated Supplies
VAT exemption means that some goods and services are not subject to VAT. Businesses that supply these goods don't charge VAT to their customers. They also can't reclaim VAT on their business costs related to these products.
This is different from zero-rated supplies. In this case, companies do not charge VAT but can claim back the VAT on the related business expenses.
Some zero-rated supplies:
- Exports of goods and services to outside the GCC (Gulf Cooperation Council)
- International transportation, and related supplies
- Supplies of certain sea, air, and land means of transportation (such as aircraft and ships)
- Certain investment-grade precious metals (e.g. gold, silver, of 99% purity)
- And some more.
Implications of VAT Exemptions
For Businesses
Businesses that deal in exempt supplies can't charge VAT on what they sell and can't get VAT back on expenses related to those supplies. That can affect their pricing strategy and how they manage costs.
For example, a bank that offers VAT-exempt financial services can't claim back VAT on the expenses it incurs for providing those services, which could affect its operating costs.
For Consumers
VAT exemptions help lower the cost of essential goods and services, so it's a win-win for customers..
For example, the rental exemption means that tenants don't have to pay additional taxes on their rent. Also, public transport being VAT-free keeps commuting costs low for everyone.
For the Economy
VAT exemptions are used strategically to help certain industries and keep the economy stable. The government ensures that essential services such as housing and public transportation remain affordable by providing tax relief. This helps to promote economic growth and improve social welfare.
VAT Exempt Categories
Financial Services
Financial services that involve transactions and the exchange of money usually don't have to pay VAT. This includes the following:
- Interest on loans and credit cards
- Transfers of money
- Issue, allotment, or transfer of ownership of an equity or debt security
Residential Property
The sale and lease of residential property are VAT-exempt, with certain conditions:
- There is no tax on the first supply of new residential property within 3 years of completion
- Selling, renting, and other subsequent transactions of an existing residential property are VAT-exempt.
There are some types of buildings that are not residential. For these properties, the VAT rate is 5%.
- Buildings or places are not fixed to the ground and can be moved without damage: trailers, campers, etc.
- Any place used as hotels, motels, bed and breakfast places, or similar.
- A serviced apartment where you get not only a room to sleep in but also some extra services
- Any building constructed or remodeled without legal authority.
Bare Land
Bare land refers to land that is not covered by buildings or developed. Just land😊.
This category is about keeping land transaction costs low and encouraging real estate growth.
Local Passenger Transport
Buses, taxis, metro, and other forms of local passenger transport are not under the VAT. This exemption aims to make UAE public transportation more affordable and accessible.
Sightseeing tours and other entertainment-oriented excursions are standard-rated.
It doesn't sound too difficult. But if you're not sure about VAT or exemptions, just let us know and we'll help you through it. In the bunch, you get consultations about corporate tax, tax residency, and more about accounting. Tab the button below and let's work together.
Partial VAT Exemption
Partial VAT exemption allows businesses to work out how much they've sold that's exempt from VAT and how much is standard/zero-rated over a certain period, usually a year. This then affects how much input VAT they can claim back.
Businesses determine how much of their sales are exempt from VAT and how much is taxable to determine what percentage of the VAT they can claim back. For instance, if it's 50/50, they can get 50% back on the VAT paid on expenses for those sales.
Another option is the "de minimis" method. Businesses can claim back all input VAT if the total is within a certain annual limit, usually around AED 15000 to 20000.
A partial VAT exemption can benefit smaller businesses by making it easier to manage VAT and reducing the hassle of dealing with complicated paperwork.
Record-keeping for VAT exemptions in the UAE
Companies need to keep records for at least five years to prove their exemption status. These records must show why a company was exempt from VAT on certain supplies. If there's an audit, these records will help prove the validity of your VAT exemptions.
The documents for the audit:
- Invoices
- Receipts
- Documents related to all imports and deliveries of goods and services
- VAT returns
- Documents related to services and goods used for non-business purposes
- Records of any corrections or adjustments that have been made to tax invoices or other accounts
- Documents showing why a supply is exempt from VAT
Keeping proper records for VAT exemptions can be a bit tricky, because there are so many little details to keep track of. To make sure you don't get confused, why don't you give us a call? We can help you get your records sorted so you're ready for any audits. We can also take care of your company's books and paperwork if needed. Click here to schedule a free consultation with one of our experts.
