VAT Exempt Supplies in UAE

Many invoices in the UAE show “exempt” instead of 5 percent VAT. These lines sit under a special category called VAT exempt supplies in UAE. They carry zero output tax yet also block related input tax. 

Article 46 of the VAT Decree-Law lists four main exempt areas: financial services, residential buildings, bare land and local passenger transport. Getting these calls right matters because mistakes affect registration, partial exemption and cash flow.

What “VAT Exempt” Really Means

Under UAE law, an exempt supply is a business sale where no VAT is charged and input VAT linked to that supply cannot be recovered.

That is different from a zero-rated supply. Zero-rated items carry 0 percent VAT on the invoice, yet still allow full recovery of input tax. For example, many exports and the first sale of a new home sit at zero rate, not exemption.

So when a transaction falls in exempt supplies in UAE VAT, VAT cost often sticks inside the business. Banks, landlords and passenger transport operators feel this effect most.

Key points to keep in mind:

• Output VAT is not charged to the customer
• Input VAT on related costs is largely non recoverable
• Mixed businesses need a method to split recoverable and blocked VAT

Main VAT Exempt Supplies In UAE

Article 46 now lists four core UAE VAT exempt supplies. Each has its own conditions in the Executive Regulations and later clarifications.

Financial Services

Many margin-based financial services are exempt. This includes interest on loans, credit cards and standard bank accounts where the bank earns a spread instead of a clear advisory fee.

Recent FTA updates confirm that management of licensed investment funds and some virtual-asset transfers also sit inside financial services exemption. When a bank or fund manager charges an explicit advisory or arrangement fee, that fee can move back to standard rate VAT, so contracts need care.

For finance houses, the impact is strong. They collect no VAT on interest. At the same time, much of the input VAT on general overheads becomes non recoverable under partial exemption rules.

Residential Buildings (Beyond First Supply)

The sale or lease of residential buildings is generally exempt after the first supply. The first sale or lease within three years of completion is zero rated so developers can recover construction VAT. Later sales and long-term rentals fall in exempt supplies VAT UAE.

To qualify, the building must meet the residential definition. Staff housing and certain student housing can qualify. Hotels, serviced apartments and commercial units stay outside this exemption and are usually taxed at 5 percent.

Bare Land

Bare land means land without completed buildings or civil engineering works. Its sale or lease is exempt. As soon as substantial construction begins, later sales usually turn taxable or zero rated depending on use.

This line matters for developers that hold large land banks. Input VAT on planning, legal work and some early infrastructure may not be recoverable if the intention is to keep the land undeveloped or to lease it out as bare land.

Local Passenger Transport

Local passenger transport by bus, taxi or metro inside the UAE is exempt, provided it uses a qualifying means of transport and moves people, not freight.

International passenger transport usually sits at zero rate instead. So a bus carrying workers inside one emirate can be exempt, while a ticket on a flight out of the UAE is usually zero rated. This difference shapes pricing and input VAT recovery for transport operators and schools.

How Exempt Supplies Affect Input VAT

Once a business makes VAT exempt supplies in UAE, it needs to test input VAT recovery carefully. Input tax splits into three baskets:

• Directly linked to taxable or zero-rated sales: normally recoverable
• Directly linked to exempt sales: blocked
• General overheads: shared and subject to a partial exemption method

The standard method uses a turnover-based fraction that compares taxable turnover and total turnover. Special methods can be negotiated with the FTA for complex groups where simple turnover splits give unfair results.

Even small exempt streams can cut recovery rates on general costs. For example, a property company that earns residential rent and commercial rent may watch its recoverable percentage fall each year if residential income grows faster than commercial.

Mapping Exempt Supplies in Contracts, Invoices and Returns

Correct labels across documents reduce disputes during an FTA review. Practical steps:

• Tag each product or service in the ERP as standard rated, zero rated or exempt
• Show “VAT exempt” clearly on invoices instead of leaving the tax box blank
• Include the legal basis in footnotes, for example “Exempt under Article 46(2) residential lease”
• Train sales and legal teams so contract wording aligns with the VAT treatment

On the VAT return, exempt turnover usually appears in the “Exempt supplies” box, not under zero-rated exports. This visibility helps the FTA check partial exemption and non recoverable input VAT.

Common Mistakes Around VAT Exempt Supplies in UAE

These patterns show up often when the Arnifi team reviews UAE returns:

• Treating all property rent as exempt and missing VAT on commercial units
• Booking school bus fees at 5 percent instead of exempt local passenger transport
• Treating margin-based bank charges as standard rated service fees
• Forgetting to adjust input VAT recovery when exempt turnover grows year by year

Fixes usually need contract review and a look at historic returns. Correcting early costs less than leaving issues until a full audit cycle passes.

How Arnifi Helps With Exempt Supply Mapping

Arnifi reviews contracts, charts of accounts and VAT returns to match them with Article 46 and current FTA clarifications. The team tests sample invoices, maps income streams into taxable and exempt blocks and designs clear partial exemption methods. 

That way, VAT exempt supplies in UAE show up correctly on paper and in systems. Our clients see the real VAT cost of residential rent, passenger transport or financial services before they price the next deal.

FAQs

1. What are the main VAT exempt supplies in UAE?

Key exempt areas are margin-based financial services, most residential leases, bare land and local passenger transport inside the UAE under Article 46 of the VAT Decree-Law.

2. How is exemption different from zero rate VAT?

Exempt supplies carry no output VAT and block linked input VAT. Zero-rated supplies show 0 percent VAT yet still allow full recovery of input VAT on related costs and overheads.

3. Does a business that only makes exempt supplies need VAT registration?

A business that makes only exempt supplies normally cannot register, even if turnover is high, because its supplies do not count as taxable for UAE VAT registration tests.

4. Can input VAT on costs linked to exempt rent ever be recovered?

Input VAT directly tied to exempt residential rent is usually blocked. Partial exemption can still allow recovery on some shared overheads when the business also makes taxable or zero-rated supplies.

5. What should a company do if it mis-classified an exempt supply as standard rated?

It may need to correct VAT returns, adjust invoices and refund over-charged VAT to customers. Professional advice is wise because corrections can affect partial exemption and penalty exposure.