UAE VAT has a standard rate of 5%, and three treatments that are not charged at 5%: zero-rated, exempt and out of scope. They are easy to confuse because none of them produces VAT on the invoice. The difference is what happens behind the invoice. A zero-rated supplier recovers input VAT. An exempt supplier does not. An out-of-scope supplier sits outside the system altogether.
The three treatments side by side
| Zero-rated (0%) | Exempt | Out of scope | |
|---|---|---|---|
| VAT charged to customer | 0% | None | None |
| Counts towards the registration threshold | Yes | No | No |
| Input VAT on related costs | Recoverable | Not recoverable | Not recoverable, as a rule |
| Shown on the VAT return | Yes, as a taxable supply | Yes, as an exempt supply | Generally not reported as a supply |
Zero-rated supplies
A zero-rated supply is a taxable supply at 0%. The supplier is fully within the VAT system, files returns and recovers input VAT. Typical examples:
- Exports of goods and services outside the GCC. See zero-rated exports and export of services.
- International transport and related services.
- The first supply of a residential building within three years of its completion.
- Certain education and preventive and basic healthcare services.
- Investment-grade precious metals, and crude oil and natural gas.
The usual consequence is a refund position, because the business pays VAT on costs and charges none on sales. See how to claim a VAT refund.
Exempt supplies
An exempt supply is outside the charge to VAT, but the supplier cannot recover the VAT on costs that relate to it. The main categories are:
- Certain financial services, where the return is built into a margin rather than a fee.
- Residential property, other than the first supply, which is zero-rated.
- Bare land.
- Local passenger transport.
The restriction on recovery is the real cost. A business making only exempt supplies cannot usually register for VAT at all, and one making both exempt and taxable supplies must apportion its input VAT. See conditions to claim input VAT.
Out-of-scope supplies
An out-of-scope supply is not a supply made in the UAE for VAT purposes, or is not a supply at all. Examples include:
- Goods and services supplied outside the UAE, where the place of supply is elsewhere.
- Services an employee provides to their employer under an employment contract.
- The transfer of a business as a going concern, where the conditions are met.
- Certain activities of government bodies carried out as a sovereign authority.
These are not reported as sales on the return, and the related input VAT is generally not recoverable unless the cost relates to a taxable activity.
Where businesses get it wrong
- Treating a zero-rated export as exempt. The business then fails to recover input VAT it was entitled to claim.
- Zero-rating without evidence. An export without proof is taxed at 5%. The FTA looks for shipping documents and payment evidence.
- Ignoring apportionment. A business with some exempt income and no apportionment overclaims.
- Confusing out of scope with zero-rated. Supplies made outside the UAE can look like exports but follow different rules.
Related reading: the reverse charge mechanism, designated zones and deemed supply. If you are unsure how a supply should be treated, a VAT health check tests the classification against your actual invoices.
A worked example
A consultancy invoices two customers in a month, each for AED 10,000, and each is treated differently.
| Customer | Where they are | VAT treatment | VAT charged |
|---|---|---|---|
| A | A UAE company | Standard-rated | AED 500 |
| B | A company outside the GCC, with the service used outside the UAE | Zero-rated export of services, if the conditions are met | AED 0 |
Customer B is the one that needs evidence. The conditions for treating a service as an export are strict; see export of services and UAE VAT.
How apportionment works
A business with both taxable and exempt supplies cannot recover all its input VAT. It recovers the share that relates to taxable supplies. Costs that relate directly to taxable supplies are recovered in full, costs that relate directly to exempt supplies are not recovered at all, and shared overheads are split on a reasonable basis, most often by the proportion of taxable to total supplies. The result is adjusted after year end. A business with only a little exempt income may meet a de minimis rule, but the conditions are specific, so take advice before assuming it applies.
A classification check
- Is the supply made in the UAE under the place-of-supply rules? If not, it is out of scope.
- Is it on the list of zero-rated supplies, and is the evidence in place? If yes, 0%.
- Is it on the list of exempt supplies? If yes, exempt.
- Otherwise it is standard-rated at 5%.
How the three treatments show up in different businesses
| Business | Typical mix | Main VAT question |
|---|---|---|
| Goods exporter | Mostly zero-rated | Export evidence and refund claims |
| Freight forwarder | Zero-rated international transport plus 5% local services | Splitting the invoice correctly |
| Landlord with shops and flats | 5% and exempt | Apportioning input VAT |
| Lender or bank | Mostly exempt financial services | Input VAT largely irrecoverable |
| Professional services firm | 5% locally, zero-rated exports of services | Proving where the customer and the benefit are |
What goes on the invoice
The tax invoice must show how each line is treated. A zero-rated line shows 0%, and an exempt line is marked as exempt. An invoice that mixes rates should show the amount at each rate and the VAT on each. A supplier that is unsure whether a line is zero-rated or exempt should resolve it before issuing the invoice, because correcting a wrong invoice means a credit note and reissue. See tax invoice requirements.
When to ask the FTA
Where the law is unclear, the FTA publishes guidance and answers specific questions through its clarification process. A written answer protects you if the FTA later takes a different view. See FTA private clarifications and how FTA guidance binds you.
Frequently asked questions
A zero-rated supply is taxable at 0% and the supplier recovers input VAT. An exempt supply is outside the charge to VAT and the supplier cannot recover input VAT on related costs.
Yes. They are taxable supplies. Exempt and out-of-scope supplies do not count.
Certain financial services, residential property after the first supply, bare land and local passenger transport.
The transaction is not a supply made in the UAE for VAT purposes, or is not a supply at all, so VAT does not apply. Examples are services between employee and employer and goods supplied outside the UAE.
No. Input VAT relating to exempt supplies is not recoverable, and a business with both taxable and exempt supplies has to apportion.
Exports of goods and qualifying services outside the GCC are zero-rated, but only with the required evidence. Without it the supply is taxed at 5%.