What Does “VAT Exempt” Mean?

In UAE VAT law, VAT exempt means a good or service is not subject to VAT and no VAT is charged on its supply. Unlike zero-rated supplies, you cannot recover input VAT on expenses related to exempt activities.

Why Are Some Supplies Exempt?

Certain industries are exempt to:

• Protect consumers from higher costs (e.g., housing, education)
• Align with global tax best practices
• Reduce complexity in non-commercial sectors (e.g., local transport)

Which Sectors Are VAT Exempt in the UAE?

As of 2025, the following categories are exempt from VAT:

1. Residential Real Estate (After First Sale)

• Second-hand sale or lease of residential property
• Long-term rentals (≥ 6 months or with Emirates ID)

2. Certain Financial Services

• Margin-based financial services (e.g., interest on loans, credit card fees)
• Life insurance (fully exempt)

Note: Fee-based services like account opening or advisory may be standard-rated.

3. Local Passenger Transport

• Metro, buses, taxis, school transport
• Includes public ferry and air transport within UAE

VAT Exempt vs Zero-Rated – What’s the Difference?

Feature	Exempt	Zero-Rated
VAT charged?	❌ No	✅ 0% charged
Input VAT claimable?	❌ No	✅ Yes
Shown in VAT return?	✅ Yes (in exempt box)	✅ Yes (in zero-rated box)
Examples	Local transport, bank interest	Exports, first sale of new property

Partial Exemption – Mixed Supplies

Some businesses may offer both taxable and exempt supplies (e.g., schools, hospitals, financial institutions). In such cases:

• You can only reclaim input VAT proportionally
• FTA requires partial exemption calculation

Examples of VAT-Exempt Scenarios

Scenario	VAT Status
Second sale of an apartment	Exempt
Monthly bus pass for staff	Exempt
Interest on bank deposit	Exempt
Export of goods outside GCC	Zero-rated
Rent of commercial shop	Standard-rated (5%)
Sale of gold jewellery	Standard-rated (5%)

Do VAT-Exempt Businesses Need to Register?

• If only exempt supplies, registration is not required
• If making taxable + exempt supplies, and taxable turnover ≥ AED 375,000, registration is mandatory

Common Mistakes to Avoid

• Misclassifying zero-rated as exempt (or vice versa)
• Claiming input VAT on exempt-only activities
• Failing to report exempt supplies in the VAT return
• Charging VAT on exempt services (illegal)

Most Searched VAT Exemption FAQs (2025)

Q: Is residential rent subject to VAT in UAE?
A: No, long-term residential rent is VAT exempt. Short-term stays (e.g., hotels) are standard-rated.

Q: Is school tuition exempt from VAT?
A: Yes, government-accredited schools and universities are exempt or zero-rated. However, uniforms, books, and canteen services are taxable.

Q: Can a company register for VAT if it only offers exempt services?
A: No, unless it also engages in taxable supplies or exceeds the voluntary threshold via expenses.

Q: Are medical services exempt from VAT?
A: If licensed and preventive/curative in nature, they are zero-rated, not exempt.

Conclusion

Understanding which goods and services are exempt from VAT is critical for accurate invoicing, return filing, and input tax claims. Misinterpretation can lead to FTA audits, penalties, and cash flow issues.

Need Support with Compliance?

At Think Biz Management Consultancies, we help you:

• Identify VAT-exempt vs taxable supplies
• Apply partial exemption rules correctly
• File accurate VAT returns
• Avoid penalties through proper documentation
• Respond to FTA audits and queries

Contact us today for a free consultation.
Let our VAT experts simplify your compliance and keep your business audit-ready.

 

Contact us today for a free consultation.

Contact number: ‪+971 50 983 0334‬

Email ID: info@alphabets.ae