VAT exemption in UAE refers to business entities in the United Arab Emirates that can’t undergo UAE VAT registration or to goods or services that aren’t subject to VAT.
When most services or products are sold anywhere in the region, an indirect tax referred to as Value Added Tax (VAT) is added to the original sales price of the services or products. However, VAT is not applicable to certain services or goods. Products or services that are not to be taxed upon their sale or acquisition are exempt from VAT as per Federal Tax Authority directives.
Some business entities and charities can be VAT exempt as well. For a business, it has to sell VAT-exempt services or products to be VAT exempt. A non-profit should not be involved in taxable business activity as well.
Goods and Services that are VAT Exempt
Although most services or goods in UAE are taxed at the current VAT rate, which is 5%, there are those that are exempt from VAT as mentioned earlier. If a product or service is considered exempt from VAT, it is because it’s essential.
The Federal Tax Authority Has Provided a List of the Products and Services, and It Includes the Following:
- Education and training
- Oil and gas
- Real Estate
- Select financial services
Products and Services Exempt From VAT Are, of course, Non-taxable
This means that:
- A business should not charge the current VAT rate at the prices of the exempt items sold;
- VAT can’t be reclaimed n the exempt item that was purchased;
- VAT-exempt product sales don’t count toward a business’ VAT-taxable turnover;
- Records for sales of VAT-exempt goods and services are not required
The Difference Between VAT Exemption and Zero-Rated Items
VAT exemption isn’t the same as zero-rated goods or services. There's no extra charge that’s added to a product or service that is VAT-exempt or zero-rated, but there are a couple of major differences.
Technically speaking, a zero-rated product or service is still taxable. As for an item that is exempted from VAT, it is not. Basically, it means unlike the sale of a VAT-exempt product, the same as a zero-rated product or service will be considered in the taxable turnover of the business. Additionally, the sale of a product or service that is zero-rated has to be added in the accounts of the business for VAT, whereas a non-taxable sale is only to be added in the regular books of business.
VAT Exemption for Business in UAE
If a business supplies services or goods that are all VAT-exempt, then the entire business entity will be considered from VAT-exempt.
If it’s a VAT exempt business, then it can’t undergo VAT registration. Just like any other business that is not VAT Registered, a VAT exempt company:
- Can't charge the current VAT rate on every sale made;
- Can’t reclaim VAT for any business expense – even if the purchase included VAT charge;
- Isn't required to file VAT returns;
- Isn’t required to maintain records for VAT
VAT partial exemption
In some cases, businesses are considered partially VAT-exempt. You may be wondering how this may be possible. Exemption from VAT partially can apply to a company that has registered for VAT if it is selling both VAT-exempt and taxable products/services.
If a business is VAT exempt partially, then it can reclaim the VAT incurred from the acquisition or production of VAT-exempt products or services.
A partially exempt business has to keep a separate book or accounts of VAT-exempt sales. In addition, it has to provide details regarding the calculation of VAT when it is due for VAT returns filing with the Federal Tax Authority.
Charities: VAT exempt?
Non-profit organizations, including some charities, are generally running with the rules that apply to VAT registration and the exemption for companies in the region that are earning profits.
This means those with taxable supplies turnover above the mandatory threshold have to register for VAT. A VAT-registered non-profit will be able to charge VAT only on taxable products and services that have been sold to customers to clients.
This also means a non-profit that makes zero taxable sales are exempt from VAT registration and shouldn't apply.
There are two major reasons why charities don’t have taxable sales:
- They are not selling taxable goods or services;
- They are not involved in any business activity.
Find out more: Procedure of Filing VAT Returns in Dubai, UAE
Examples of VAT Exempt non-profit
A charity running a tourist attraction – the Federal Tax Authority in UAE considers this as a business. For a charity that gives rescue service, it does not have any business activity, so it is VAT-exempt.
In the UAE, VAT and taxation laws are fairly new. This is the reason why it is best to consult with VAT specialists to ensure compliance and reduce the risk of acquiring VAT fines for violations to the legislation. Talk to our Vat Consultant in Dubai UAE and book a free consultation.