Exempt Supplies in UAE: A Complete Overview

Ever since the introduction of VAT (Value Added Tax) in the UAE, the Federal Tax Authority (FTA) has implemented four types of VAT ratings for supplies. However, the new tax regime and its application to businesses have got taxpayers confused about standard supplies, zero-rated supplies, and exempt supplies in UAE, thereby leading to more chaos and errors in business operations as well as the financial health of the organization.

Hence, it has become crucial for companies to distinguish between various VAT ratings in order to grasp the various aspects of value-added tax. This blog will discuss the concept of VAT in the UAE, the different types, and the list of exempt supplies in UAE.

Value-Added Tax in the UAE

VAT is basically an indirect tax applied to the supply of most goods and services. According to the UAE VAT law, all businesses operating in the country are mandated to register for VAT. They will collect the tax on sales and transfer the amount to the Federal Tax Authority (FTA) after deducting the VAT paid on their purchases.

Understanding the UAE VAT law is crucial as it helps businesses maintain compliance with the FTA guidelines and ensure accurate financial reporting. The law also stipulates businesses to handle exempt and zero-rated supplies differently than standard-rated supplies.

Types of VAT supplies in the UAE

The VAT system of the UAE mainly operates on three tiers:

Standard supplies – The standard rate of 5% is applied to a wide range of goods and services.

Zero-rated supplies – A 0% VAT is applied to specific goods and services including exports outside the GCC public transportation services, etc. However, the VAT paid on the purchase of raw materials for the production of zero-rated goods can be recovered from the FTA.

Exempt supplies – A scenario where no tax is charged at any point in the supply chain for certain items, such as residential properties, certain financial services, etc.

Exempt supplies in UAE

By definition, exempt supplies refer to the provision of goods and services where no tax is levied and no input tax can be claimed. The UAE executive regulations specify certain goods and services as exempted supplies on which no VAT is charged. However, unlike zero-rated goods, businesses supplying exempt goods cannot claim the input tax paid on their purchases.

For instance, if they have paid VAT at 5% on the purchase of raw materials and the finished good falls under the category of exempt supply, then they cannot claim the 5% Input VAT paid on the purchases. Rather it would be treated as the cost of the product.

VAT–exempt supplies in UAE

Certain financial services, residential buildings, and supply of bare land, local passengers, etc. are exempt from VAT in the UAE. However, companies need to fulfill specific conditions stipulated in the VAT Act and Executive Regulations of the UAE.

Financial Services

The services that are categorized under exempt supplies VAT UAE are:-

• Services not conducted in return for an explicit fee, discount, commission, rebate, or any similar return
• Issuance, allocation, or transfer of ownership of an equity security or debt security
• Transfer of ownership of a life insurance contract or the provision of re-insurance in respect of such contract

However, the major question that arises here is how to identify whether the service provided by the organization is a financial service. Although there is no specific definition of financial service in the UAE VAT Executive Regulation, it has listed the instances that would be counted as financial services.

Financial services are basically connected with dealing in money or its equivalent and providing credit. It includes the exchange of currency issues, provision of loans, advances, or credit, operating any current, deposit or savings account, etc. If any of the mentioned services are offered in return for an explicit fee, commission, discount, rebate, or similar return, it would be considered a taxable supply.

Residential Buildings

The supply of residential buildings would be classified under exempt supplies VAT UAE in the following conditions:-

• The lease/rent is more than 6 months (in reference to the contractual period of tenancy)
• The tenant holds an ID card issued by the Emirates Identity Authority

Residential buildings that are intended and designed for human occupation are VAT-exempt in the UAE. These include residential places, accommodation for students, armed forces, and police, orphanages, nursing homes, and rest homes. On the whole, all residential accommodations that satisfy the above conditions are exempted from VAT.

So, what kind of buildings would not be considered residential buildings? The non-residential accommodations that are subject to 5% VAT in the UAE are:-

• Places that are not fixed to the ground and can be moved without being damaged
• Buildings used as hotels, motels, bed and breakfast establishments, or hospitals
• A serviced apartment providing services in addition to the supply of accommodation
• Buildings constructed or converted without legal authority

Bare Land

Lands that are not covered by fully-constructed buildings or partially constructed buildings or civil engineering works are considered Bare lands, and hence, categorized under exempt supplies in UAE.

Local Passenger Transport Services

Transport services that are supplied by way of transport by land, water, or air from one place to another place in the State are exempted from VAT in the UAE. This includes motor vehicles such as taxis, buses, trains, trams, monorails, ferry boats, abra, or other similar vessels or transport designed or adapted for the transport of passengers.

According to the Civil Aviation Act, helicopters or airplanes designed and approved for the transport of passengers are also exempted. Nevertheless, transport services that are used for pleasure trips or international carriage will not be exempted and therefore, will be subject to 5% VAT under the UAE executive regulation.

Impact of Exempt Supplies on Businesses

Understanding the impact of VAT-exempt supplies on the business can play a vital role in VAT compliance and financial planning. The key aspects are:-

• According to the law, businesses dealing in exempt supplies do not need to register for VAT.
• The entities must report the value of their exempt supplies in the VAT return but cannot claim any input tax on them.
• Since the VAT paid on business expenses cannot be recovered, the overall cost incurred by the company might be higher compared to zero-rated supplies.

Non-recoverable input tax

Non-recoverable input tax is the tax incurred by the company on certain purchases and expenses but cannot claim any input credit for it. This VAT amount is non-deductible when calculating the net payable of the taxpayer. Here are different categories of expenses where the taxpayer cannot claim input VAT credit:

• Entertainment services provided to clients, potential customers, and shareholders (For example, meals, events, or other activities considered entertainment in the VAT rules)
• Usage of business vehicles for private purposes
• Goods and services purchased for personal use of the employees (For example, staff outings, gifts, and club memberships)

Conclusion

Thus, companies need to assess the tax treatment of their supplies properly. To ensure clarity and understanding, it is advisable to seek help from the best accounting and auditing firms in the UAE such as Shuraa Tax. The tax consultants of Shuraa have years of experience in the field of taxation and auditing and therefore, can offer top-notch accounting and management solutions.

Consult with Shuraa Tax at www.shuraatax.com