Since the introduction of VAT in the UAE on January 1, 2018, many businesses have struggled to fully understand the difference between Zero-Rated VAT and Exempt VAT. While both classifications mean no VAT is charged to the customer, they have very different impacts on a business’s ability to recover input VAT and its VAT compliance obligations.
This guide breaks down these two terms to help businesses understand their responsibilities and avoid costly mistakes when preparing VAT returns.
What is Zero-Rated VAT?
Zero-rated supplies are taxable supplies subject to a VAT rate of 0%, meaning no VAT is collected from the customer—but businesses making these supplies can recover input VAT on related expenses.
Examples of Zero-Rated Supplies (Article 45 of Federal Decree-Law No. (8) of 2017)
✔ Exports of goods and services outside VAT-implementing GCC states
✔ Certain educational services and associated supplies
✔ Specified healthcare services and related goods
✔ International transportation of passengers and goods
✔ First supply of residential buildings (within 3 years of completion)
✔ Investment-grade precious metals
✔ Certain oil and gas supplies
✔ Newly built charitable buildings
What is Exempt VAT?
Exempt supplies, on the other hand, are not considered taxable supplies, meaning no VAT is charged to the customer and businesses cannot recover input VAT on related expenses.
Examples of Exempt Supplies (Article 46 of Federal Decree-Law No. (8) of 2017)
✔ Certain financial services (e.g., interest on loans, life insurance)
✔ Residential property resale
✔ Bare land sales and leases
✔ Local passenger transport (e.g., taxis, metro, buses)
✔ Certain government activities
✔ Activities of non-profit organizations
Key Differences Between Zero-Rated and Exempt VAT
| Aspect | Zero-Rated VAT | Exempt VAT |
| VAT Charged to Customer | 0% VAT charged | No VAT charged |
| Input VAT Recovery | ✅ Yes, businesses can claim back VAT paid on purchases related to zero-rated supplies | ❌ No, businesses cannot claim back VAT on purchases related to exempt supplies |
| Taxable Turnover | Included in taxable turnover | Excluded from taxable turnover |
| VAT Registration | Businesses must register if turnover exceeds AED 375,000 | Businesses only making exempt supplies may not need to register |
| Compliance Requirements | Full VAT records required, including invoices and returns | Simplified compliance, but VAT cannot be reclaimed |
Why It Matters for Your Business
✔ Cash Flow Impact
With zero-rated supplies, you can recover VAT on expenses—helping your cash flow. With exempt supplies, you lose that ability, increasing your overall costs.
✔ Reporting Obligations
Zero-rated supplies count towards the VAT registration threshold and require full VAT records. Exempt supplies do not contribute to taxable turnover and come with fewer reporting obligations.
✔ Pricing Strategy
Businesses making exempt supplies may need to increase prices to account for non-recoverable VAT on costs, directly impacting profitability.
Practical Example
Imagine a medical equipment supplier exporting products to a non-VAT GCC country. These exports qualify as zero-rated, so the company charges 0% VAT to customers—but they can still reclaim VAT paid on importing equipment or purchasing materials.
In contrast, a company offering local passenger transport services (e.g., taxis or metro) makes exempt supplies. They do not charge VAT to customers and cannot recover VAT on their expenses—directly increasing their operational costs.
Why Expert Guidance Matters
Misclassifying supplies—whether zero-rated or exempt—can lead to incorrect VAT returns, penalties, and unnecessary financial loss. Many businesses still face confusion in correctly applying VAT treatment, especially if they deal with a mix of taxable, zero-rated, and exempt supplies.
Get Professional VAT Support
Our VAT experts provide end-to-end consultancy, ensuring your transactions are correctly classified, your VAT returns are accurate, and your business remains fully compliant with UAE VAT laws.
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References
- Federal Decree-Law No. (8) of 2017 on Value Added Tax
- UAE VAT Executive Regulations
FTA Guidance on VAT Treatment of Supplies