Zero-Rated vs. Exempt VAT: What UAE Businesses Need to Know

Finact
Jul 22
2 min read

In the case of VAT in the UAE, one thing that usually perplexes entrepreneurs is the distinction between zero-rated and exempt supplies. Although both appear to entail 0% VAT or no VAT, both are handled quite differently under UAE taxation and misinterpreting the difference might affect your compliance as well as your cash flow.

If you are not sure which category your business activity would fall into, taking advice from VAT consultants in UAE or availing VAT advisory services in the UAE can spare you from making costly errors. Let’s dissect it first:

What Are Zero-Rated Supplies?

Zero-rated supplies are taxable but at a 0% VAT rate. This implies that you do not charge VAT to customers, but you can recover the VAT you paid on business expenses.

Examples of Zero rated supplies: Exports of goods or cross-border services tend to fall under this category, certain educational and healthcare services, international transportation.

Key takeout: You are still regarded as a VAT covered business when you are supplying zero-rated supplies, and you are required to registered under UAE VAT. The plus point? You are able to recover your input VAT, which can enhance your cash flow.

What Are Exempt Supplies?

Exempt supplies are completely out of scope from VAT and you cannot claim VAT charged on any business expenses unlike zero-rated supplies. This can increase the cost of your operations, particularly if your input costs are high.

Examples of exempt supplies: Residential rents, some financial services (such as interest on a loan), and public transport services like buses.

Key point: If you provide only exempt supplies, you won't be required to register for VAT. However, you also would not have the option of claiming VAT on your costs which can increase your operational cost.

What is the Difference?

Below is a quick comparison to remember:

Feature	Zero-Rated VAT	Exempt VAT
VAT charged to customers	No	No
Input VAT recovery	Yes	No
VAT registration	Usually required	Not required (if only exempt supplies)
Filing returns	Yes	Yes

Why VAT consultancy services in Dubai are Important for Your Business?

If your company is making taxable, zero-rated and exempt supplies, then VAT gets more complicated. You will have to determine how much input VAT you can recover depending on your supplies. This is where working with a VAT consultancy firm in Dubai could be useful, they understand how to organize your VAT records properly and according to FTA requirements.

Misclassifying your supplies will result in overpaying tax, losing VAT refunds, or compliance problems in the event of an audit. This is the reason why most companies, particularly in real estate, healthcare, and finance, count on expert VAT consultants in UAE to ensure accuracy.

Final Thoughts

Understanding the distinction between zero-rated and exempt supplies under VAT is more than just checking the compliance box. It can have implications for how much VAT you claim, whether you are required to register, and how you manage your business finances. If you are not sure where your business is going or how to best optimize your VAT position take a moment to contact us,