Exempt Supplies

Supplies exempt from VAT and their impact on input recovery.

Exempt Supplies

Exempt supplies are goods or services that are not subject to VAT (0% or 5%). Unlike Zero-Rated supplies, the supplier cannot recover the Input VAT paid on business expenses related to these supplies.

• No Tax Charged: You do not add any VAT to the invoice for the customer.
• Cost Absorption: Any VAT you pay to your own suppliers for these services becomes a business cost and cannot be reclaimed from the FTA.
• Registration Threshold: Income from exempt supplies does not count toward the mandatory registration threshold of AED 375,000.

2. Main Exempt Sectors in the UAE

Under Article 46 of the Decree-Law, there are four primary categories of exempt supplies:

A. Financial Services

Specific financial services are exempt, particularly those where the remuneration is not an explicit fee but is instead derived from an implicit margin or interest.

• Exempt: Life insurance, interest-based products (loans, mortgages), providing credit, and operations involving currency or debt securities.
• Note: If a bank or financial institution charges an explicit fee, commission, or rebate for a service, that specific fee is usually subject to the standard 5% VAT.

B. Residential Buildings (Sale or Lease)

While the first supply of a new residence is zero-rated, subsequent transactions are generally exempt.

• Exempt: The sale or lease of residential buildings (apartments, villas) after the first three years of their completion.
• Residential Purpose: To qualify, the building must be intended for occupation as a primary residence. It does not include hotels, motels, or serviced apartments (which are standard rated).

C. Bare Land

• Exempt: The supply (sale or lease) of "Bare Land."
• Definition: Land is considered "bare" if it does not have any completed or partially completed buildings or civil engineering works on it. Once construction starts, the status of the land may change for VAT purposes.

D. Local Passenger Transport

• Exempt: Public transportation services for passengers within the UAE.
• Scope: This includes buses, taxis, metro, and tram services intended for the transport of people.
• Exclusion: This exemption does not apply to the transport of goods (freight) or to international transportation (which is zero-rated).

3. Partial Exemption and Input Tax Recovery

If your business makes both taxable (Standard/Zero-Rated) and exempt supplies, you are considered a "mixed-supply" business. You must use a Partial Exemption Method to calculate how much Input VAT you can recover:

• Direct Attribution: VAT on expenses used only for taxable sales is fully recoverable. VAT on expenses used only for exempt sales is non-recoverable.
• Apportionment: For shared overheads (like office rent or electricity), you must apply an apportionment formula (usually based on turnover) to determine the recoverable percentage.