Why Is This Difference Important?

Understanding the difference between zero-rated and exempt supplies is essential because it affects:

• Whether you charge VAT on your invoice
• Whether you can recover input VAT on business expenses
• Your VAT return entries and compliance status

What is Zero-Rated VAT?

A zero-rated supply is:

• Taxable at 0%
• Input VAT on related purchases is recoverable

You must register for VAT and file returns if you only make zero-rated supplies and exceed the AED 375,000 threshold.

Examples of zero-rated supplies in UAE:

• Export of goods/services outside GCC
• International air/sea transport
• First supply of residential property (within 3 years of completion)
• Certain healthcare and education services
• Gold & diamond supply to registered dealers

What is VAT Exempt?

An exempt supply is:

• Not subject to VAT
• Input VAT on related expenses is not recoverable

If you only make exempt supplies, you cannot register for VAT, unless voluntary registration based on expenses is justified.

Examples of exempt supplies:

• Residential rental (long-term lease)
• Margin-based financial services (e.g., loan interest)
• Local passenger transport (e.g., RTA buses, taxis)

Side-by-Side Comparison: Exempt vs Zero-Rated

Feature	Zero-Rated	Exempt
VAT Rate	0%	0%
Must issue tax invoice?	✅ Yes	✅ Yes (no VAT shown)
Can reclaim input VAT?	✅ Yes	❌ No
Must register for VAT?	✅ Yes (if above threshold)	❌ No (unless mixed supplies)
Reported in VAT return?	✅ Yes (Box 6 & 7)	✅ Yes (Box 8)
Examples	Exports, new residential sale	Rent, life insurance, bus services

What Are Zero-Rated Supplies in UAE?

These are goods or services taxed at 0% VAT, but businesses can still recover input VAT on related purchases.

Examples:

• Export of goods/services outside GCC
• International transportation
• First sale of residential property (within 3 years of completion)
• Certain healthcare and education services (if licensed)

FTA Note: Must meet specific criteria to apply zero-rate (e.g., buyer’s location, valid export documentation).

What Are VAT-Exempt Supplies?

These are not subject to VAT, and suppliers cannot recover any input VAT related to exempt sales.

Examples:

• Residential rental (after first sale)
• Local passenger transport
• Life insurance
• Margin-based financial services (e.g., loan interest)

No tax invoices with VAT should be issued for exempt supplies.

Example Scenarios

Example 1: Exporting Goods to Europe

• Supply: AED 100,000
• VAT Rate: 0%
• Input VAT on packaging: AED 5,000 → claimable

Example 2: Renting an Apartment in Dubai

• Rent: AED 80,000/year
• VAT Rate: Exempt
• Input VAT on repairs: AED 3,000 → not claimable

Common Mistakes Businesses Make

• Charging 5% VAT on exempt/zero-rated supplies
• Claiming input VAT on exempt-only activities
• Treating zero-rated supplies as exempt (affects refund claims)
• Omitting exempt supplies from VAT return (Box 8)

Mixed Supply Businesses: Partial Exemption Rule

If your business offers both exempt and taxable/zero-rated supplies, you must:

• Use partial exemption calculation
• Claim only the eligible portion of input VAT
• Maintain clear and seperaterecords for each activity

FTA requires businesses to justify how they allocate input tax across exempt and taxable revenue.

Example: A private school offering tuition (zero-rated) and canteen services (taxable) must apportion input VAT accordingly.

Why Input VAT Recovery Matters

Scenario	Zero-Rated	VAT-Exempt
Can reclaim VAT on office rent?	✅ Yes	❌ No
Can offset input VAT from advertising expenses?	✅ Yes	❌ No
Can file VAT returns showing refund?	✅ Yes	❌ Not applicable

This directly affects your cash flow and profitability.

Most Searched FAQs (2025)

Q: Can I claim input VAT on zero-rated sales?
A: Yes, input VAT is fully claimable on expenses related to zero-rated supplies.

Q: Can I register for VAT if I only make exempt supplies?
A: No, unless you make taxable supplies or your expenses exceed the voluntary threshold (AED 187,500).

Q: Are educational services exempt or zero-rated?
A: They are zero-rated if provided by a government-approved institution. Otherwise, they may be standard-rated.

Q: Can I recover VAT on costs if I make only exempt supplies?
A: No, input VAT is not recoverable on exempt activities.

Q: Is it better to be zero-rated or exempt?
A: Zero-rated is more beneficial because you can still claim input VAT.

Q: How to apply zero-rating on exports?
A: Must prove goods left UAE (export docs), and invoice the customer with 0% VAT.

Q: Do I have to file VAT returns if I only make exempt supplies?
A: No, if you only supply exempt goods/services and fall below the threshold, you don’t register and don’t file returns.

Impact of Misclassification

Incorrectly classifying supplies may lead to:

• FTA penalties
• Overpayment of tax
• Input VAT rejection
• Delays in refunds

Always cross-check your transactions and seek expert advice to ensure proper treatment.

Conclusion

Understanding the difference between VAT-exempt and zero-rated supplies is essential for:

• Accurate VAT filing
• Maximizing input VAT recovery
• Staying compliant with FTA regulations
• Avoiding costly penalties or errors

Need Support with Compliance?

At Think Biz Management Consultancies, we help you:

• Identify whether your supplies are zero-rated, standard, or exempt
• Structure your VAT return accurately
• Recover maximum eligible input VAT
• Avoid misclassification and penalties
• Stay updated with the latest FTA rules

Contact us today for a free consultation.
Let our VAT specialists guide your business to full compliance.

 

Contact us today for a free consultation.

Contact number: ‪+971 50 983 0334‬

Email ID: info@alphabets.ae