Difference Between Zero Rated and Exempt VAT UAE

Running accounts in the UAE means dealing with more than the standard 5 percent VAT rate. Some sales sit at 0 percent but still count as taxable. Others sit outside VAT and block input tax. 

Getting this line wrong changes cash flow, registration needs, and even contract pricing. It’s vital to understand the difference between zero rated and exempt VAT UAE rules in clear steps. One should cherish simple examples that finance teams can plug straight into their day to day work.

Quick View: Zero Rated Vs Exempt

Under the UAE VAT Decree Law, zero-rated supplies are taxable at 0 percent and listed in Article 45. Exempt supplies are listed in Article 46 and sit outside VAT.

A fast way to remember the difference between exempt and zero rated VAT in UAE:

• Zero rated = in the VAT system at 0 percent, input tax usually recoverable
• Exempt = outside VAT, linked input tax usually blocked

The words look similar on paper, yet the treatment in returns and invoices is very different.

What Is Zero Rated VAT In UAE?

Zero-rated supplies are still taxable. The VAT rate is simply 0 percent instead of 5 percent. They must appear on VAT returns and count towards the registration threshold.

Common examples in UAE VAT exempt and zero rated items for the zero rated side include:

• Direct export of goods and services outside the GCC implementing states
• International transport of passengers or goods that starts or ends in the UAE
• First supply of a new residential building within three years of completion
• Some health care and education services when conditions in the Executive Regulations are met

For a business this means:

• The invoice shows VAT at 0 percent, not blank
• Output tax is zero, yet input VAT on linked costs can still be reclaimed
• These sales form part of “taxable supplies” for registration tests

If a company makes only zero-rated supplies, it can apply for exception from registration, yet only after meeting strict conditions in Article 46 of the Executive Regulations.

What Is Exempt VAT In UAE?

Exempt supplies are not subject to VAT. No VAT is charged, and linked input VAT is generally non recoverable.

Article 46 lists four main exempt and zero rated VAT in UAE categories on the exempt side:

• Certain financial services, such as many interest based products
• Sale or lease of residential buildings beyond the first supply
• Sale or lease of bare land
• Local passenger transport inside the UAE

Here the invoice usually shows “VAT exempt” or a similar note. Those sales do not count as taxable supplies for mandatory registration. Input VAT on directly related costs is blocked and goes to expense.

For example, a landlord that only earns long term residential rent may not recover VAT on brokerage and repair bills, unless some of those costs also support taxable income.

The Core Difference Between Zero Rated And Exempt VAT UAE

Seen side by side, the difference between zero rated and exempt VAT UAE sits on three levers.

1. Registration And Turnover

• Zero-rated supplies count towards the AED 375,000 registration threshold.
• Exempt supplies do not.

So a small export trader may still need registration, while a pure residential landlord might not.

2. Input VAT Recovery

• Zero rated: linked input VAT is normally fully recoverable.
• Exempt: linked input VAT is blocked, with only partial recovery on shared costs.

This single rule often decides project margins more than the headline VAT rate.

3. Reporting On The VAT Return

• Zero rated sales go into the zero-rated box of the VAT return.
• Exempt sales sit in a separate exempt box.

Mixing those lines makes partial exemption and audits much harder.

Practical Examples: How The Difference Plays Out

To make the difference between zero rated and exempt VAT UAE easy to see, use two short case studies.

Case 1 – Export Service Firm

A consultancy in Dubai advises a client based fully outside the UAE and meets the export tests in FTA guidance. Fees are zero rated. The firm charges 0 percent VAT yet recovers VAT on rent, software and travel.

Case 2 – Local Passenger Transport

A school charges parents for daily bus transport inside one emirate. That income is exempt from local passenger transport. No VAT is charged, and input VAT on bus repair or fuel is not recoverable in full.

Both invoices may show 0 percent in practice. Only the first keeps the business inside the VAT system for input tax.

Mapping UAE VAT Exempt And Zero Rated Items

To keep records clean, finance teams can run a simple mapping exercise:

• Pull the full income list from the general ledger
• Tag each line as standard rated, zero rated, exempt, or outside scope
• Match each tag with the legal reference, such as “Article 45 export services” or “Article 46 local passenger transport”

This grid then drives tax codes in the ERP and gives a live list of UAE VAT exempt and zero rated items for staff and advisers.

Common Mistakes To Avoid

Typical errors Arnifi sees when reviewing returns:

• Treating the second sale of a home as zero rated instead of exempt
• Booking bank charges at 5 percent when they fall under exempt financial services
• Leaving tax boxes blank on zero-rated invoices instead of showing 0 percent
• Forgetting to adjust partial exemption when exempt turnover grows

Each mistake can snowball into under claimed or over claimed VAT and can trigger penalties if not fixed before an FTA review.

How Arnifi Helps With VAT Tax Filing in the UAE?

Arnifi reviews contracts, invoices and VAT returns to map every line into the right bucket. Our team tests sample invoices, checks law references, and explains the difference between zero rated and exempt VAT UAE in simple language to both finance heads and owners. With that map in place, pricing talks, lease terms and export contracts all move on the right VAT footing.

FAQs

1. What is the simple difference between zero rated and exempt VAT in UAE?

Zero rated supplies are taxable at 0 percent and allow input VAT recovery. Exempt supplies sit outside VAT and usually block input VAT linked to those sales.

2. Do exempt supplies count towards the VAT registration threshold?

No. Only taxable supplies, including standard rated and zero-rated sales, count towards the AED 375,000 registration test for UAE VAT.

3. Can a business that makes only zero-rated supplies skip VAT registration?

It can request an exception, yet only when all supplies are zero rated. The FTA must approve that request before normal registration duties stop.

4. Are residential rents zero rated or exempt?

The first sale or lease of a new residential building within three years is usually zero rated. Later sales and most long term residential rents are exempt instead.

5. Why does correct labelling of exempt and zero-rated sales matter?

It shapes input VAT recovery, registration tests, and VAT return boxes. Wrong labels can lead to penalties and extra tax during an FTA audit.