Zero-rated and exempt supplies both end up looking the same on an invoice, no VAT charged, which is exactly why they get confused. The difference that actually matters sits behind the scenes: a business making zero-rated supplies can recover the VAT it paid on related costs, while a business making exempt supplies cannot. That single difference affects registration decisions, pricing, and, for businesses that make both taxable and exempt supplies, how much input VAT can be recovered at all.
This guide covers what qualifies as zero-rated versus exempt under UAE VAT law, how registration works for each, and what happens when a business makes both kinds of supplies at once.
What Are Zero-Rated Supplies
Zero-rated supplies are taxable supplies charged at 0% VAT, no VAT is added to the invoice, but because they remain technically taxable, suppliers can still recover input VAT paid on related business costs. Under Article 45 of Federal Decree-Law No. 8 of 2017, zero-rated supplies include:
- Healthcare services, including primary and preventive care and related supplies
- Educational services, covering pre-schools, nurseries, and government-owned or funded primary and higher education
- Supply of crude oil and natural gas
- Precious metal investments
- The first supply of residential buildings within 3 years of completion, whether by lease or sale
- Buildings constructed for charitable purposes, whether by rental or sale
- Conversion of commercial buildings to residential use, by rental or sale
- Transport of goods or passengers by land, air, or sea (subject to specific conditions, see below)
- Vessels and aircraft used for rescue operations by land or sea
- Exports of goods and services outside the GCC
The transport category above needs a caveat this list alone doesn’t capture: local passenger transport is zero-rated or exempt depending on whether it’s genuinely public, and restricted transport (school buses, employee shuttles) is actually standard-rated, not zero-rated. This distinction is covered in full in a dedicated guide, since it’s more nuanced than a single line item suggests.
Also check: VAT Consultants in UAE
Registration Requirements for Zero-Rated Supplies
A business must register for VAT once taxable supplies, including zero-rated supplies, exceed AED 375,000 in a 12-month period, or are expected to exceed that threshold within the next 30 days. A business making exclusively zero-rated supplies, with no standard-rated supplies at all, can apply to the FTA for an exception from registration. If granted, the business won’t need to file regular VAT returns, but it also won’t be able to claim input tax credits, so this exception isn’t automatically the better option for every zero-rated supplier, particularly one with significant recoverable input VAT on costs.
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What Are Exempt Supplies
Exempt supplies are not subject to VAT at all, and unlike zero-rated supplies, suppliers of exempt supplies cannot recover input VAT on related costs. The main exempt categories are:
- Local passenger transport (where genuinely public, see the caveat above)
- Supply of bare land
- Residential buildings, other than the zero-rated first supply
- Financial services, including insurance, life insurance, and reinsurance not charged through an explicit fee, commission, rebate, or discount
Separately, tourists shopping in any of the seven emirates can claim a VAT refund through the official Tourist Refund Scheme, generally recovering around 85% of the VAT paid after an administrative fee, though this operates through a dedicated refund mechanism rather than the supplier simply not charging VAT at the point of sale.
VAT Registration for Exempt Supplies
A supplier making only exempt supplies is not required to register for VAT, and correspondingly cannot claim input tax credits on business expenses. Renting out residential property is the most common example, a landlord earning only exempt residential rental income generally has no VAT registration obligation on that basis alone.
Must check: VAT Return Filing Services
Zero-Rated Versus Exempt: Quick Comparison
| Criteria | Zero-rated supplies | Exempt supplies |
|---|---|---|
| Definition | Taxable at 0% | Not taxable at all |
| Examples | Exports, certain healthcare, first supply of new residential property | Financial services, residential buildings (other than first supply), bare land, genuinely public local transport |
| Input tax recovery | Recoverable | Not recoverable |
| VAT registration | Required once taxable turnover, including zero-rated, exceeds AED 375,000 | Not required if all supplies are exempt |
| VAT return filing | Required | Not required if all supplies are exempt |
Partial Exemption: When a Business Makes Both Taxable and Exempt Supplies
Many businesses don’t fall neatly into one category. A real estate company selling both new residential units (zero-rated) and reselling older residential property (exempt), or a bank offering both fee-based advisory services (standard-rated) and interest-based lending (exempt), makes both taxable and exempt supplies at the same time. This triggers a partial exemption calculation: input VAT directly attributable to taxable supplies (standard-rated and zero-rated) is fully recoverable, input VAT directly attributable to exempt supplies is not recoverable at all, and input VAT on costs that serve both, general overheads like office rent or admin salaries, must be apportioned between the two based on an FTA-approved method, typically the ratio of taxable to total supplies.
As a worked example: a business has AED 100,000 in general overhead input VAT for the year, and its supplies split 70% taxable and 30% exempt by value. Under a standard apportionment method, AED 70,000 of that input VAT is recoverable and AED 30,000 is not, in addition to whatever input VAT is separately and fully attributable to purely taxable or purely exempt activities. Getting this apportionment wrong, either by over-claiming input VAT on the exempt portion or under-claiming on the taxable portion, is one of the more common findings in an FTA VAT audit for businesses with a mixed supply profile.
Common Mistakes When Classifying Zero-Rated and Exempt Supplies
- Treating “no VAT charged” as proof the classification doesn’t matter. The invoice looks the same either way, but the input VAT recovery consequence is completely different.
- Assuming all local transport is exempt. Only genuinely public transport is exempt, restricted transport like school buses and employee shuttles is standard-rated.
- Not registering when zero-rated supplies push turnover over the threshold. Zero-rated supplies count toward the AED 375,000 mandatory registration threshold just like standard-rated ones.
- Skipping partial exemption apportionment. Businesses with both taxable and exempt supplies need a documented, defensible apportionment method for shared overhead input VAT, not just a rough estimate.
- Applying the registration exception without weighing the input VAT trade-off. Exclusively zero-rated suppliers can apply for an exception from registration, but that also means giving up input VAT recovery entirely.
Frequently Asked Questions (FAQs)
What is the difference between zero-rated and exempt supplies in the UAE?
Do zero-rated supplies count toward the VAT registration threshold?
Does a business making only exempt supplies need to register for VAT?
What is partial exemption in UAE VAT?
Can a business making only zero-rated supplies avoid VAT registration?
Is local transport always exempt from VAT in the UAE?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Farahat & Co. helps businesses correctly classify their supplies, manage VAT registration decisions, and apply partial exemption apportionment for mixed taxable and exempt activity.
Contact Farahat & Co. today to discuss your VAT classification and registration requirements.
