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Co-Founder & CEO movingo
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Iakov Kukushkin
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Mar 27, 2026
When doing business in the UAE, it is important to understand the VAT (Value Added Tax) regulations. In many cases, businesses are required by law to register for VAT. However, there are certain categories of goods and types of businesses that are exempt from paying VAT.
This article will discuss the differences between exempt and zero-rated supplies, and how to avoid penalties related to VAT.
This article will discuss the differences between exempt and zero-rated supplies, and how to avoid penalties related to VAT.
- UAE VAT introduction
- Different VAT rates in UAE
- What are exempt supplies in UAE VAT?
- What is the difference between zero-rated and exempt VAT?
- VAT exemption list in UAE: Goods and services
- Partial VAT exemption
- Which supplies are not eligible for input tax recovery?
- Impact of exemptions on businesses and individuals
- Process of applying for VAT exemption
- VAT compliance and exemption implications
- Audits and penalties
- Common misconceptions with VAT exemptions
- VAT services by movingo
- VAT exemptions FAQ
UAE VAT introduction
VAT is a value-added tax that is applied at each stage of the supply chain. Businesses must collect and remit this tax to the Federal Tax Authority (FTA). The standard VAT rate in the UAE is 5%. It was introduced on January 1, 2018.
- Business must register for VAT if its annual turnover exceeds AED 375,000.
- VAT registrants must file VAT returns and collect VAT from customers.
- Companies whose annual turnover exceeds AED 187,500 may choose to register for VAT.
Different VAT rates in UAE
Now, let's take a look on exemptions that apply to VAT.
What are exempt supplies in UAE VAT?
VAT exemption means that certain goods and services are not taxed with VAT. Businesses that sell these goods do not charge VAT to their customers, and they also cannot claim VAT on the business costs associated with these products. One of the key concepts here is exempt supply.
In the UAE, "exempt supplies" refer to goods or services that are not subject to VAT and are therefore "outside the scope" of taxation for the end user. Unlike taxable supplies, the seller does not charge VAT on these items. However, businesses face a challenge as they cannot claim back the VAT they have paid on their business expenses (Input tax) related to these exempt supplies.
In the UAE, "exempt supplies" refer to goods or services that are not subject to VAT and are therefore "outside the scope" of taxation for the end user. Unlike taxable supplies, the seller does not charge VAT on these items. However, businesses face a challenge as they cannot claim back the VAT they have paid on their business expenses (Input tax) related to these exempt supplies.
💡 Note: This is different from zero-rated supplies, where companies do not pay VAT but can reclaim the VAT on related business expenses.
What is the difference between zero-rated and exempt VAT?
This is the most common point of confusion.
- Zero-rated
Although you charge 0% VAT, you are still "in the game." You can reclaim the VAT that you paid on your business expenses, such as office rent, utilities, and supplies.
Zero-rated supplies examples
- Exports of goods and services to outside the GCC (Gulf Cooperation Council)
- International transportation, and related supplies
- Supplies for certain means of transportation, such as aircraft and ships, by sea, air, and land.
- Certain investment-grade precious metals, such as gold and silver of 99% purity.
- And some more.
- Exempt
You do not charge VAT, but you cannot claim any VAT back on your costs. This means that VAT is effectively an additional cost for your business.
VAT exemption list in UAE: Goods and services
The UAE Federal Tax Authority (FTA) maintains a strict, narrow list of exempt supplies:
-
💰 Financial services
Margin-based services are ones in which no explicit fee is charged, for example, interest on loans, life insurance, and issuance of debt securities. -
🏠 Residential buildings
The sale and lease of residential properties are exempt from VAT, provided that certain conditions are met:- No tax is levied on the initial sale of new residential properties within three years of completion.
- The sale, rental, and subsequent transactions of an existing residential property are exempt from VAT.
-
🏜 Bare land
Sale or lease of undeveloped land without any buildings or engineering work. -
🚌 Local passenger transport
Public transport within the UAE, including buses, taxis, and the Metro.
Partial VAT exemption
Many businesses, such as banks and mixed-use real estate developers, offer both taxable and non-taxable products and services. In these situations, you cannot claim 100% input tax credit. Instead, you must use an allocation method, usually based on the proportion of taxable versus non-taxable turnover, to determine how much VAT can be legally recovered.
Businesses determine how much of their sales are exempt from VAT and how much is taxable in order to determine what percentage of VAT they can claim back. For example, if it's a 50/50 split, they can get back 50% of the VAT paid on expenses related to those sales.
Another option is the "de minimis" method, which allows businesses to reclaim all input VAT if the total amount remains below a certain annual threshold. This limit is typically around AED 15,000–20,000, which can benefit smaller businesses by making VAT management easier and reducing the hassle of dealing with complex paperwork.
Businesses determine how much of their sales are exempt from VAT and how much is taxable in order to determine what percentage of VAT they can claim back. For example, if it's a 50/50 split, they can get back 50% of the VAT paid on expenses related to those sales.
Another option is the "de minimis" method, which allows businesses to reclaim all input VAT if the total amount remains below a certain annual threshold. This limit is typically around AED 15,000–20,000, which can benefit smaller businesses by making VAT management easier and reducing the hassle of dealing with complex paperwork.
Which supplies are not eligible for input tax recovery?
Even if your business is fully taxable, the FTA blocks recovery on the following:
- Expenses related to exempt supplies.
- Entertainment services, such as hospitality for non-employees.
- Vehicles used for personal purposes.
Impact of exemptions on businesses and individuals
For individuals exemptions keep the cost of living stable (no VAT on residential rent or public transport). For businesses, VAT exemptions can increase operational costs. If a business provides only exempt services, it cannot register for VAT and must pay the 5% tax that it would normally pay to its suppliers.
Process of applying for VAT exemption
Most exemptions are automatic, depending on the nature of your business. However, if you only provide zero-rated goods or services, you may be able to apply for an exception from registration to avoid the administrative burden of filing taxes and returns.
Required documentation
If you are applying for an exception or undergoing an audit to prove your exempt status, you will need the following:
-
Valid UAE trade license. - Detailed business flowchart that explains the nature of the services.
- Sample invoices show that no tax was charged.
- Turnover declarations signed and stamped
The submission procedure
All applications are handled via the EmaraTax portal.
- Log in to your FTA account.
- Choose "VAT" and then "Administrative Exceptions.”
- Upload your supporting letter and evidence.
The submission procedure
The FTA usually takes between 20 and 45 business days to review exception requests. If more information is required, the clock resets once it is provided.
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-
Accounting: financial order for businesses and freelancers. - Taxes: meeting deadlines, compliance, avoiding penalties.
- Company formation: paperwork you could need, from business plan to company incorporation.
- Visas: documents for entry and stay, employees and families relocation.
VAT compliance and exemption implications
In 2026, the FTA implemented stricter regulations regarding historical claims. It is now mandatory to keep records of all transactions for at least 5 years, and 15 years in the case of real estate transactions. This includes contracts and documentation confirming that the land was unoccupied or the property was residential.
Audits and penalties
The FTA can audit your classification of exempt vs. taxable supplies. Common penalties include:
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Incorrect filing: Up to AED 2,000 for repeated offenses.
-
Failure to keep records: AED 10,000 (1st offense), rising to AED 20,000.
-
Late payment: The previous multi-stage penalty system will be simplified by shifting toward a flat 14% annualized rate (as of April 2026).
You can read more about fines and other consequences of violating the FTA regulations in this article.
Common misconceptions with VAT exemptions
VAT services by movingo
Maintaining accurate records for VAT exemptions can be a challenging task, as there are many small details that need to be kept track of. To avoid confusion, why not contact us? Our accounting services in the UAE cover a wide range of activities, from bookkeeping to Corporate Tax registration, helping businesses stay compliant and efficient. Whether you need outsourced accounting service in Dubai or professional advice from our auditors, we are here to help.
VAT exemptions FAQ
Exemptions ensure that essential costs remain steady by preventing additional taxes on rent, public transportation, and basic financial services in the Emirates. This helps keep costs affordable for residents and families.
No, businesses can't get their VAT back on expenses related to zero-rated goods. Instead, that tax becomes a business cost that has to be taken into account or included in prices.
Businesses should regularly conduct revenue audits to categorize income as taxable, zero-rated, or exempt. If the business provides both taxable and exempt services, it is also vital to use a proper apportionment formula.
Specific suppliers like residential landlords, bare land sellers, and local transport operators are exempt from charging VAT. Additionally, small businesses earning below the AED 375,000 threshold are not required to register for or charge VAT.
Zero-rated VAT is a tax rate of 0% applied to exports, international travel, essential healthcare, and education. Unlike exempt supplies, businesses that make zero-rated sales can reclaim the VAT they paid on their own expenses.
No, you must be VAT-registered and have a valid TRN to claim tax refunds from the FTA. If you are not registered, any VAT you pay to suppliers is non-recoverable, regardless of your sales rate.
