Zero-Rated vs Exempt Supplies
Understanding the critical difference between zero-rated and exempt supplies in UAE VAT.
Zero-Rated (0%)
Taxable at 0% - you can recover input VAT on related expenses.
Exempt
Not taxable - you cannot recover input VAT on related expenses.
Why the Difference Matters
The distinction between zero-rated and exempt supplies is crucial for your VAT calculations and cash flow:
- Zero-rated: You don't charge VAT to customers, but you can claim back VAT you paid on purchases related to these supplies.
- Exempt: You don't charge VAT to customers, AND you cannot claim back VAT on related purchases—it becomes a cost to your business.
Zero-Rated Supplies in the UAE
Zero-rated supplies are taxed at 0% VAT. While no VAT is charged on the output, the business can recover input VAT on expenses used to make these supplies.
Zero-Rated Categories
Exports of goods to outside GCC
Must have proof of export documentation
International transport services
Passenger and freight transport to/from UAE
Certain education services
Curriculum-based education from pre-school to secondary
Certain healthcare services
Preventive and curative healthcare services
First supply of residential property
Within 3 years of completion, new buildings only
Investment precious metals
Gold, silver, platinum meeting specific purity standards
Crude oil and natural gas
Supplies between businesses
Exempt Supplies in the UAE
Exempt supplies are not subject to VAT. The supplier cannot recover input VAT on expenses related to these supplies.
Exempt Categories
Financial services
Interest on loans, life insurance, margin-based products
Residential property rent
Long-term residential leases (not hotels)
Bare land
Sales or leases of undeveloped land
Local passenger transport
Public buses, metro, taxis, water transport
Second-hand residential property
Subsequent sales/leases of residential property
Real Estate: A Special Case
Real estate VAT treatment in the UAE is complex:
Residential Property
- First supply within 3 years: Zero-rated
- Subsequent supplies: Exempt
- Residential rent: Exempt
Commercial Property
- All supplies: Standard rated at 5%
- Commercial rent: Standard rated at 5%
Bare Land
Sales and leases of bare (undeveloped) land are exempt, regardless of intended future use.
Healthcare and Education
Not all healthcare and education is zero-rated. The rules are specific:
Healthcare
- Zero-rated: Preventive and basic curative care
- Standard rated: Elective cosmetic procedures, veterinary services
Education
- Zero-rated: Curriculum-based pre-school to secondary education
- Standard rated: Higher education, vocational training, tutoring
Impact on Your VAT Return
When making zero-rated or exempt supplies, you must still report them on your VAT return:
- Zero-rated supplies: Report in Box 2
- Exempt supplies: Report in Box 3
If you make both taxable and exempt supplies, you may need to apportion your input VAT recovery—see our Input VAT Recovery Guide.
Choosing Your Business Structure
If you have a choice, making zero-rated supplies is generally more advantageous than exempt supplies because:
- You can recover all input VAT on related expenses
- Your costs are lower
- You can price more competitively
Automated Supply Classification
Compliance Copilot automatically categorizes your supplies as standard, zero-rated, or exempt for accurate VAT calculations.
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