Out-of-Scope Sales

Transactions that fall outside the scope of UAE VAT.

Out of Scope Sales

A transaction is "Out of Scope" if it does not meet the legal criteria to be considered a taxable or exempt supply within the UAE. This typically occurs because:

  • No Supply Exists: There is no exchange of goods or services for consideration (payment).
  • Outside UAE Jurisdiction: The transaction takes place entirely outside the geographical territory of the UAE.
  • Non-Business Activity: The activity is not conducted as part of a "business" as defined by the law.

2. Common Categories of Out of Scope Transactions

A. Transactions Outside the UAE Territory

Even if a business is registered for VAT in the UAE, some of its activities may happen abroad.

  • Overseas Sales: If a UAE company buys goods in China and sells them directly to a customer in the UK without the goods ever entering the UAE, the sale is Out of Scope.
  • Services Provided Abroad: Services performed entirely at a location outside the UAE (and not received in the UAE) may be considered Out of Scope depending on the "Place of Supply" rules.

B. Statutory & Government Payments

Payments made to government bodies that are not in exchange for a specific service or good are generally Out of Scope.

  • Examples: Fines, penalties, business license fees, and statutory deposits.
  • Reasoning: These are legal obligations or sovereign functions rather than commercial supplies.

C. Compensation, Damages, and Donations

  • Insurance Claims/Damages: Payments received to compensate for a loss (e.g., an insurance payout or a court-ordered settlement for breach of contract) are usually Out of Scope because they are not for a supply of goods or services.
  • Pure Donations: Grants or donations where the donor receives no benefit or service in return are Out of Scope.

D. Internal Business Movements

  • Head Office & Branch: Transactions between a head office and its branches (or between two branches of the same legal entity) are generally not considered supplies and are therefore Out of Scope.
  • Tax Groups: Supplies made between members of the same VAT Tax Group are treated as being outside the scope of VAT.

4. Impact on Input VAT Recovery

Because Out of Scope sales are not part of a "taxable activity," you generally cannot recover the VAT you paid (Input Tax) on expenses directly related to these sales.

  • Example: If you pay for marketing in the UAE to specifically promote a service that is Out of Scope, that 5% VAT on the marketing bill might not be recoverable.
  • Mixed Activities: If your business has both taxable and Out of Scope activities, you may need to apply a "Partial Exemption" or "Apportionment" method to calculate your recoverable tax.

5. Compliance and Invoicing for Your Website

  • No Tax Invoice: You should not issue a "Tax Invoice" for Out of Scope sales. Instead, use a standard Commercial Invoice.
  • Accounting Records: Even though they aren't on the VAT return, the FTA requires you to maintain records of all business transactions, including those Out of Scope, to prove why VAT was not charged.
  • Registration: If your only business activity is Out of Scope, you are not required (and generally not allowed) to register for UAE VAT.

Read more at https://www.zaivista.com/knowledge/vat-out-of-scope-sales.