Understanding Zero-Rated Supplies in UAE: Key Insights and Guidelines

Whether your business is export-focused or mainly operates in the UAE itself, you need to know when a supply qualifies as zero-rated and when it doesn’t. Businesses that understand the difference can turn zero-rated supplies into a tax advantage.

Under the UAE VAT framework, zero-rated supplies attract a 0% value-added tax (VAT) and are eligible for input tax recovery.

These supplies can include various items pertaining to education, healthcare, residential properties, and exports, depending on the circumstances.

This article explores the financial impact of zero-rated supplies, how businesses should leverage such items, and compares them with exempt supplies.

What Are Zero-Rated Supplies in UAE?

Zero-rated supplies refer to goods and services that attract a 0% VAT rate under the UAE VAT law.

They should not be confused with exempt supplies where VAT is inapplicable. Invoices for zero-rated supplies show a 0% VAT charge, whereas invoices for exempted supplies don’t mention VAT charges.

This minute difference in VAT treatment has major repercussions. Since VAT is technically charged on zero-rated supplies, businesses can recover input tax on related costs for such supplies.

On the other hand, businesses dealing with exempt goods and services cannot recover input tax.

Thus, the UAE tax framework allows companies dealing in zero-rated VAT supplies to improve their cash flows and overall profit margins.

VAT treatment by category

UAE VAT Classification: Zero-Rated and Exempt Supplies

Understanding the difference between zero-rated and exempt supplies is essential for VAT compliance. In both categories, customers do not pay VAT charges, but they have completely different input tax treatment.

As mentioned earlier, input tax recovery is allowed for zero-rated supplies, not exempt ones.

Another key difference between zero-rated and exempt supplies is regarding VAT registration. If businesses deal only in exempt supplies, they are not required to register for VAT. In contrast, businesses dealing only in zero-rated supplies can apply for an exception from VAT registration if they meet VAT exception requirements. However, you cannot recover input tax without VAT registration.

Key differences between zero-rated and exempt supplies

• Input tax treatment:
  • Recoverable for zero-rated supplies
  • Not recoverable for exempt supplies

• VAT registration requirements:
  • Zero-rated supplies: Mandatory VAT registration once the threshold is reached, but an exception is available
  • Exempt supplies: VAT registration is not required

List of Goods and Services Exempted from Value Added Tax

Pro Tip:

Businesses dealing in zero-rated and exempt supplies must maintain separate VAT documentation to avoid misclassification penalties.

Comprehensive List of Zero-Rated Supplies in UAE: Goods and Services With 0% VAT

The following list outlines goods and services subject to a 0% VAT rate under the UAE VAT Law:

1. Export of goods

Export of goods that leave the UAE or move into approved customs suspension regimes within 90 days from the supply date are zero-rated, if the following conditions are also met:

A. Direct exports – Supplier arranges transportation

• • Exporter maintains official and commercial export evidence or customs suspension
  • Example: A UAE factory shipping electronics to Germany.

B. Indirect exports – Recipient handles collection in UAE

1. • The recipient maintains official and commercial export evidence or customs suspension and shares copies with the exporter
   • No use or alteration of goods between supply and export or customs suspension, other than what’s needed for preparing the goods for export or customs suspension
   • Goods must not leave the UAE under the custody or control of passengers or crew members of an aircraft or ship
   • Recipient must not reside in the UAE, have a Tax Registration Number (TRN) in the UAE, or have a place of establishment or fixed establishment in the UAE
   • Example: European companies buying auto parts in Dubai for export to Spain.

2. Export of services

The benefit of the service should be outside the UAE. For example, selling UAE real estate to an international buyer will not be counted as an export of services. Also, the service recipient cannot be in the UAE or a UAE resident.

3. International transport

Transportation of goods and passengers between the UAE and another country, including transport within the UAE as part of bigger international trips, is zero-rated.

Example: Flights from Dubai to London.

4. Means of transport

Airplanes, ships, and other vehicles used to transport passengers and goods, and related supplies used in operation, repair, and maintenance, are zero-rated supplies.

5. Onboard consumption items

Items consumed onboard airplanes, ships, and other approved transportation during travel are zero-rated.

6. Precious metal investments

Investments into tradeable and 99% purity gold, silver, and platinum are zero-rated.

7. Certain property sales and leases

First sale or lease of the following buildings is zero-rated:

• • Properties to be used by charities
  • Residential buildings (within 3 years of completion)
  • Buildings converted from non-residential to residential use if the supply is made within three years of the conversion, and the original building was not used as a residence and did not form part of a residential property in the five years before the conversion began

8. Crude oil and natural gas

Example: Petroleum producers selling crude oil to registered refineries.

9. Certain educational services

Services provided by educational institutions funded or owned by the government, and the books related to the curriculum, are zero-rated.

10. Certain healthcare services

Preventive healthcare services and basic healthcare services provided by approved entities to humans are zero-rated, along with related medicines and medical equipment, if approved by the Ministry of Health.

11. Rescue-related supplies

Supplies for aircraft and vessels meant for air and sea rescue operations are zero-rated.

Conditions and Documentation for Input Tax Recovery

VAT registration with the Federal Tax Authority (FTA) and a valid Tax Registration Number (TRN) are necessary for input tax recovery.

Can my business register for VAT?

Registration is mandatory for businesses whose annual taxable turnover exceeds AED 375,000. If your business does not meet this requirement, it can still voluntarily register if its annual taxable turnover exceeds the voluntary registration threshold, i.e., AED 187,500.

VAT Registration Process

VAT registration requires an e-service account with the Federal Tax Authority (FTA) and the following documents:

Processing time for applications is approximately 20 business days. If your application is successful, you will receive a Tax Registration Number (TRN) and a VAT Certificate.

Best Practices for Compliance with VAT Rules

Adhering to the following best practices ensures smooth audits and timely input tax recovery:

1. Charge VAT as required: Books and invoices should accurately reflect VAT charges, even when the product is zero-rated.

2. Maintain proper documentation

a. Property-related documentation – At least 15 years

b. VAT-related business records – At least 5 years

i. Financial records and customs declarations for every supply and import

ii. Tax invoices (Issued and received)

iii. Goods and services not used for business purposes or for which input tax was not claimed

iv. Export documents

3. Timely filing of VAT returns: File Form VAT201 within 28 days from the end of your tax period

Impact of Zero-Rated Supplies on Your Business Expenses

Zero-rated supplies unlock two major competitive advantages. Firstly, input tax recovery improves cash flow efficiency and helps achieve higher profit margins. Secondly, because these supplies carry a 0% VAT, you can provide more competitive prices to customers and enjoy greater demand.

To maximize these gains, ensure your business:

Conclusion

Tracking and documenting transactions related to zero-rated supplies can be challenging for small businesses as well as corporations executing a lot of transactions every day. Without the proper tools, this can turn into a compliance nightmare, forcing businesses to give up valuable input tax recoveries in fear of triggering penalties.

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FAQs on Zero-Rated Supplies in UAE