UAE Zero-Rated vs Exempt Supplies: VAT Rules Explained

UAE Zero-Rated vs Exempt Supplies: The Short Answer

UAE zero-rated vs exempt supplies look alike on an invoice, because both show no VAT charged to the customer. They are very different in your books. A zero-rated supply is taxable at 0%, so you can recover the VAT you paid on related costs. An exempt supply is outside the charge to VAT, so you cannot.

Getting UAE zero-rated vs exempt supplies right decides how much VAT your business keeps. A founder who treats an exempt sale as zero-rated overclaims input VAT. A founder who treats a zero-rated sale as exempt gives away VAT that was recoverable.

This guide explains UAE zero-rated vs exempt supplies under Federal Decree-Law No. 8 of 2017 and its Executive Regulation. It covers input VAT recovery, partial exemption, the registration threshold and return filing. It ends with worked examples and seven rules you can apply to your own sales. If you are not yet registered, start with our VAT registration guide.

What the Law Says: Articles 45 and 46

The Federal Tax Authority (FTA) administers VAT. The classification rules for UAE zero-rated vs exempt supplies sit in Federal Decree-Law No. 8 of 2017 on Value Added Tax. Article 45 lists the goods and services subject to the zero rate. Article 46 lists the supplies exempt from tax.

Article 44 confirms that a zero-rated supply made by a taxable person is a taxable supply, taxed at 0%. Article 54 then says input VAT is recoverable when the costs are used to make taxable supplies. The chain for UAE zero-rated vs exempt supplies is simple: zero-rated means taxable, taxable means recoverable.

In UAE zero-rated vs exempt supplies, exempt supplies are not taxable supplies. Nothing in Article 54 lets you recover input VAT on costs used to make them, except limited cases for certain exempt supplies made outside the UAE. The Executive Regulation (Cabinet Decision No. 52 of 2017, as amended by Cabinet Decision No. 100 of 2024) adds the detailed conditions.

The official sources are the Decree-Law, the Executive Regulation and the FTA guides. You can find the guides on the FTA’s VAT guides and references page and a plain-language overview on the UAE government VAT page.

What Is Zero-Rated in the UAE

Article 45 of the Decree-Law lists the zero-rated side of UAE zero-rated vs exempt supplies. In short, the list covers:

• Direct and indirect exports of goods and services outside the GCC Implementing States.
• International transport of passengers and goods, and related transport services.
• Qualifying air, sea and land means of transport, and goods and services for their operation and repair.
• Investment precious metals.
• The first supply of a residential building within three years of completion, by sale or lease.
• The first supply of buildings designed for charities, and of buildings converted from non-residential to residential.
• Crude oil and natural gas.
• Certain education services for government-owned or government-funded institutions.
• Preventive and basic healthcare services and related goods.

Exports are the part of UAE zero-rated vs exempt supplies that most founders meet first. For goods, Article 30 of the Executive Regulation sets the test. The goods must physically leave the Implementing States, or enter a customs suspension regime, within 90 days of the supply. You must keep official and commercial evidence, such as customs export documents and an airway bill or bill of lading.

If the goods do not leave in time, VAT is charged at the rate that would have applied to a local supply. A movement of goods into a Designated Zone is not treated as an export. If you trade goods through Dubai, our re-export guide shows how the flows work.

Exports of services follow Article 31. In general, the customer must have no place of residence in an Implementing State and must be outside the UAE when the service is performed. The service must not relate directly to UAE real estate or to movable assets located in the UAE. There is also an anti-abuse rule where the service is in fact received in the UAE by someone linked to the overseas customer.

International transport is covered by Article 33 of the Executive Regulation. A journey from the UAE to a place abroad, or from abroad into the UAE, is zero-rated. So are connected services, such as insurance or arranging the transport.

What Is Exempt in the UAE

The exempt side of UAE zero-rated vs exempt supplies has four categories under Article 46 of the Decree-Law:

• Certain financial services, as specified in the Executive Regulation.
• Sale or lease of residential buildings, other than the zero-rated first supply.
• Supply of bare land.
• Supply of local passenger transport.

Financial services need care. Article 42 of the Executive Regulation sets out which are exempt and which are taxable. As a rule, an explicit margin or interest is exempt, while an explicit fee or commission is taxable. Check the exact wording before you classify a financial product.

In UAE zero-rated vs exempt supplies, residential property is defined in Article 37 of the Executive Regulation. A hotel, motel or hospital is not a residential building. A serviced apartment with services beyond accommodation is not one either. Article 43 ties the exemption of residential leases to the lease term of more than six months or to a tenant holding an Emirates ID, so short stays can fall outside the exemption.

Bare land means land not covered by completed or partially completed buildings or civil engineering works (Article 44). Local passenger transport is covered by Article 45 of the Executive Regulation. It applies to taxis, buses, trains, trams, ferries, abras and approved passenger aircraft or helicopters moving people between two places in the UAE. Pleasure trips marketed mainly for sightseeing or entertainment are excluded and are taxed.

UAE Zero-Rated vs Exempt Supplies Side by Side

The table below compares UAE zero-rated vs exempt supplies on the points that matter to a finance manager.

The practical result of UAE zero-rated vs exempt supplies is a cash difference. An exporter with large costs often receives a VAT refund. A landlord with the same costs carries the VAT as a cost. The sale price shown to the customer is the same in both cases.

Input VAT Recovery: Where the Money Is

Input VAT is the VAT you pay on purchases such as rent, software, freight, professional fees and equipment. The rules on UAE zero-rated vs exempt supplies decide how much of it you get back. Under Article 54, you may recover it only if the purchase is used, or intended to be used, to make taxable supplies. Supplies made outside the UAE that would have been taxable if made in the UAE also qualify.

This is why UAE zero-rated vs exempt supplies matters so much to input VAT recovery. Zero-rated sales keep the full recovery right. Exempt sales remove it. A company with only zero-rated exports can end each period in a refund position. A company with only exempt sales has no recovery at all and bears the VAT on its costs.

To recover input VAT you also need a valid tax invoice or equivalent document, and you must claim it on the return within the rules of Article 55 of the Decree-Law. Some costs are blocked regardless of use, such as certain entertainment and motor vehicle costs listed in the Executive Regulation. Check the blocked list before you claim.

Correct classification also feeds your invoicing system. Each invoice line needs the right VAT category, and the same data will be needed for the new e-invoicing regime. See our UAE e-invoicing guide for how classification fits into that process.

Partial Exemption: When You Make Both Kinds of Supply

UAE zero-rated vs exempt supplies become harder when a business makes both taxable and exempt supplies. A property developer might sell new apartments (a zero-rated first supply), lease older ones (exempt) and charge management fees (standard-rated). Article 55 of the Executive Regulation then requires apportionment of input VAT.

The rules work in three steps:

• Input VAT wholly related to taxable supplies is recoverable in full.
• Input VAT that does not relate to taxable supplies is not recoverable.
• Shared input VAT is apportioned, and only the taxable share is recoverable.

The apportionment percentage is rounded to the nearest whole number. At the end of each tax year you recalculate it for the whole year and adjust the difference in the first return of the next year. If the gap against actual use exceeds AED 250,000, a further adjustment is required.

If the standard method does not reflect real use, you can ask the FTA to approve an alternative method from its list of accepted mechanisms. Approval is not automatic, and you cannot change the method again until at least two tax years have passed. Keep the supporting workings with your records.

Registration Threshold and VAT Returns

Classification under UAE zero-rated vs exempt supplies affects registration before it affects recovery. Article 19 of the Decree-Law counts taxable goods and services when testing the threshold. Because zero-rated supplies are taxable, they count. Exempt supplies do not.

The mandatory registration threshold is AED 375,000 of taxable supplies over the previous 12 months, or expected in the next 30 days. The voluntary threshold is AED 187,500, which can also be met by taxable expenses. A person who must register has 30 days to apply. Our VAT registration guide covers the process in detail.

The Decree-Law also lets the FTA, on request, except a person from registration if all supplies are zero-rated (Article 15). That is a decision for the FTA, and the exception can be withdrawn if your business changes. A business that is excepted does not recover input VAT through returns, so weigh that before you ask.

On the return, zero-rated and exempt sales are reported separately from standard-rated sales. Returns are filed through the FTA portal after each tax period, and the deadline is set by the FTA, so confirm your own dates. If your taxable supplies fall below the mandatory threshold over 12 months, you may apply to deregister. Read our VAT deregistration guide before you do.

Three Worked Examples

These figures show UAE zero-rated vs exempt supplies with my own illustrations, not official numbers. They use the 5% standard rate.

Example 1: exporter. A trading company sells goods worth AED 2,000,000 to overseas customers and keeps full export evidence. The supplies are zero-rated. Its related input VAT is AED 40,000. It recovers all AED 40,000, so the export sales cost it no VAT.

Example 2: residential landlord. An investor leases flats to residents for AED 600,000 a year on 12-month contracts. The lease income is exempt. Its related input VAT on repairs and agent services is AED 12,000. It cannot recover that amount, so the AED 12,000 becomes a cost.

Example 3: mixed business. A company has AED 700,000 of taxable supplies and AED 300,000 of exempt supplies in a tax period, so 70% of its supplies are taxable. Its shared input VAT is AED 20,000. It recovers 70%, which is AED 14,000, and AED 6,000 is a cost. Input VAT wholly linked to taxable sales is added in full. At year end it recalculates the percentage on annual figures.

The three examples show the same pattern in UAE zero-rated vs exempt supplies. The customer pays no VAT in each case. The supplier’s result depends only on whether the supply is zero-rated or exempt.

Seven Rules to Apply Before You File

Use these seven rules to apply UAE zero-rated vs exempt supplies consistently.

1. Classify every sale line. Check it against Article 45 and Article 46 before you set a VAT code.
2. Treat zero-rated as taxable. Count it towards the threshold and recover related input VAT.
3. Treat exempt as non-recoverable. Do not claim input VAT linked only to exempt sales.
4. Keep export evidence. Customs documents and transport papers must support every zero-rated export of goods.
5. Watch the 90-day window. Goods not exported in time are taxed as a local supply.
6. Apportion shared costs. Use the Article 55 method, round to a whole number and run the annual adjustment.
7. Review when your activity changes. A new service line can move you from fully taxable to partly exempt.

Common Classification Mistakes

Most disputes about UAE zero-rated vs exempt supplies come from a handful of errors:

• Calling a service an export when the customer or the benefit is in the UAE.
• Zero-rating goods sold into a Designated Zone as if they had been exported.
• Zero-rating goods without customs or transport evidence.
• Treating serviced apartments or hotel stays as exempt residential rent.
• Treating a sightseeing trip as exempt local passenger transport.
• Claiming all input VAT in a business that also makes exempt supplies.

Errors in either direction cost money. Wrongly zero-rating a sale can leave you with unpaid output VAT and penalties. Wrongly treating a zero-rated sale as exempt loses recoverable input VAT. Where a rule is unclear, you can ask the FTA for a clarification.

Limits of This Article

This article covers UAE zero-rated vs exempt supplies only, not excise tax or customs duty. I read Federal Decree-Law No. 8 of 2017 and the Executive Regulation, including the edition amended by Cabinet Decision No. 100 of 2024. I did not read every FTA guide or public clarification. I did not verify the current return layout or filing deadlines against the FTA portal.

Rates, thresholds and rules can change. This is general information, not legal or tax advice. Have a UAE-qualified tax adviser check your facts before you classify a supply or claim input VAT.

FAQ

What is the difference between zero-rated and exempt supplies in the UAE?

A zero-rated supply is a taxable supply charged at 0% VAT, so the supplier stays in the VAT system and can recover related input VAT. An exempt supply is outside the charge to VAT, so the supplier cannot recover input VAT on costs linked to it. That is the core of UAE zero-rated vs exempt supplies.

Do zero-rated supplies count towards the VAT registration threshold?

On UAE zero-rated vs exempt supplies, yes. The threshold test in Article 19 of Federal Decree-Law No. 8 of 2017 counts the value of taxable supplies, and zero-rated supplies are taxable at 0%. Exempt supplies are not taxable supplies, so they do not count. The mandatory threshold is AED 375,000 and the voluntary threshold is AED 187,500.

Can I recover input VAT on exempt supplies?

Not on costs that relate to exempt supplies. Article 54 of the Decree-Law allows recovery only for costs used to make taxable supplies, which include zero-rated ones. If a cost serves both taxable and exempt supplies, you recover only the part linked to taxable supplies through apportionment under Article 55 of the Executive Regulation.

Are exports always zero-rated in the UAE?

No. In UAE zero-rated vs exempt supplies, exports of goods are zero-rated only if the goods physically leave the GCC Implementing States, or enter a customs suspension regime, within 90 days of supply, and you keep official and commercial export evidence. If you cannot prove it, VAT is charged at the rate that would apply to a local supply.

Is residential rent zero-rated or exempt in the UAE?

In UAE zero-rated vs exempt supplies, residential rent is usually exempt. Leases and sales of residential buildings are exempt under Article 46 of the Decree-Law, except the first supply within three years of completion, which is zero-rated. Hotels, serviced apartments and similar accommodation are not residential buildings and are generally taxed at 5%.

What is partial exemption in UAE VAT?

In UAE zero-rated vs exempt supplies, partial exemption applies when a business makes both taxable and exempt supplies. Input VAT linked only to taxable supplies is recoverable in full, input VAT linked only to exempt supplies is not, and shared costs are apportioned. The standard percentage is rounded to the nearest whole number and trued up after each tax year.

Your Next Step

Not sure how UAE zero-rated vs exempt supplies apply to your sales, or how that affects your input VAT? Ask us to review your structure before you register or file. Our set up the right UAE structure with the right licence, activities and tax position from day one.