Zero-Rated VAT vs VAT-Exempt Supplies in the UAE: A Complete Guide for 2025

What is Zero-Rated VAT?

Zero-rated VAT refers to supplies that are taxable, but at a 0% VAT rate. This means businesses must still record these transactions and report them in their VAT returns, but no VAT is charged to the customer.

Importantly, companies dealing with zero-rated supplies are entitled to recover any input VAT (the VAT they paid on business expenses) related to these supplies.

Examples of Zero-Rated Supplies in the UAE:

• Export of goods and services outside the GCC.
• International transportation of passengers and goods (including related services).
• Certain educational services and related goods.
• Certain healthcare services and related goods.
• Supply of crude oil and natural gas.
• First sale/rent of residential buildings (within 3 years of completion).
• Supply of investment-grade precious metals (gold, silver, platinum).

You can also refer to the official guide from the UAE Federal Tax Authority: Zero-Rated Supplies Guide (PDF)

What is VAT Exemption?

VAT exemption means that supplies are completely outside the VAT system. No VAT is charged on the sale, and input VAT cannot be recovered on costs associated with these exempt supplies.

If a business is making only exempt supplies, it cannot register for VAT in the UAE.

Examples of VAT-Exempt Supplies in the UAE:

• Certain financial services (like issuing loans or operating bank accounts).
• Residential real estate (after the first sale or rental).
• Bare land sales.
• Local passenger transport (such as taxis, buses, and metro services).
• Certain government-related transactions (when performed by government entities in their sovereign capacity and not in competition with the private sector).

Not all government activities are exempt — only those considered "sovereign activities" (e.g., issuance of passports, licensing fees, court services) are exempt. If a government entity competes with the private sector (e.g., commercial activities), it may be subject to VAT.

Common Confusions Between Zero-Rated and Exempt Supplies

It is extremely common for small businesses and new VAT registrants to confuse zero-rated and exempt supplies:

AspectZero-Rated SuppliesVAT-Exempt SuppliesVAT Rate Applied0% VAT is applied (still a taxable supply)No VAT is applied (non-taxable supply)VAT Return FilingMust be reported in VAT returnMust be reported (where applicable), but treated as exemptInput VAT RecoveryInput VAT can be recoveredInput VAT cannot be recoveredExamplesExport of goods, international transport, healthcareResidential leases (after 3 years), financial services, government sovereign activities

Real-Life Mistake Example:A small company engaged in international logistics services mistakenly classified its supplies as "Exempt" instead of "Zero-Rated." As a result, the company lost the ability to claim significant input VAT refunds, directly impacting its cash flow. Moreover, correcting such errors later through an amendment may attract a penalty of AED 500 for each amendment filed.

How to Correctly Identify and File

• Review your invoices and contracts carefully.
• Check the nature of the supply against UAE VAT Law.
• Maintain clear documentation to prove the supply type (especially for exports, real estate, or government-related services).
• File zero-rated and exempt supplies separately in your VAT return under the correct fields.
• Consult the UAE VAT guides issued by the Federal Tax Authority (FTA).

Final Thoughts

Distinguishing between zero-rated VAT and VAT-exempt supplies is not just a technical exercise — it has direct financial implications for your business. Proper categorization ensures you maximize VAT refunds (where eligible) and stay compliant with FTA regulations.

If you are unsure whether your supplies are zero-rated or exempt, it is strongly recommended to consult a professional VAT advisor or reach out to the FTA for clarification. Correct classification today can save you from costly mistakes tomorrow.

Need help with VAT filing in the UAE?
Our experienced tax consultants can assist you with accurate VAT registration, filing, and advisory services — ensuring compliance while optimizing your business cash flow.
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