In the United Arab Emirates (UAE), the implementation of Value Added Tax (VAT) in January 2018 introduced a comprehensive framework for taxation on the supply of goods and services. While the standard VAT rate is 5%, certain goods and services fall under the category of “zero-rated supplies,” meaning they are taxable but at a 0% rate. This distinction is critical for businesses because it allows for the recovery of input VAT even though no VAT is charged on the output.
Understanding which supplies qualify as zero-rated under UAE VAT Law helps businesses manage compliance and optimize their VAT recovery. In this blog, we explore the concept of zero-rated supplies, the types of goods and services that fall under this category, and the documentation required to support zero-rating.
What Does “Zero-Rated” Mean?
A zero-rated supply is one that is taxable at 0%. This means:
- The business does not charge VAT on the invoice.
- The business can still recover VAT incurred on related expenses (input tax).
- The transaction must be reported in the VAT return under zero-rated sales.
This is different from exempt supplies, where no VAT is charged and input VAT cannot be recovered. Zero-rated treatment is particularly beneficial for exporters and sectors like healthcare and education under certain conditions.
Categories of Zero-Rated Supplies Under UAE VAT Law
As per Federal Decree-Law No. 8 of 2017 and Cabinet Decision No. 52 of 2017, the following supplies qualify for zero-rating:
1. Export of Goods and Services
Exports from the UAE to outside the GCC Implementing States are zero-rated, provided that the goods physically leave the UAE within a specified time frame (usually 90 days).
Services are also zero-rated if supplied to a non-resident and if the benefit of the service is enjoyed outside the UAE.
2. International Transportation
Transport of goods and passengers to and from the UAE (by land, air, or sea) qualifies for zero-rating. This includes services such as cargo shipping, airline passenger services, and port logistics.
3. Certain Means of Transport
Supply of aircraft, ships, and trains used for commercial transport of passengers and goods is zero-rated. Also, related parts and repair services may be eligible.
4. Healthcare Services and Related Goods
Healthcare services provided by licensed medical professionals or facilities are zero-rated, provided they meet the criteria defined by the Ministry of Health or Dubai Healthcare Authority. Related goods such as pharmaceuticals and medical equipment may also qualify.
5. Educational Services
Private and public educational services from nurseries through secondary schools (and some higher education institutions) are zero-rated if licensed by the competent authorities. Educational materials and school transport services may also be included.
6. Investment in Precious Metals
Supply of investment-grade precious metals (e.g., gold, silver, platinum) with purity levels of 99% and tradable on global bullion markets are zero-rated.
7. Newly Constructed Residential Properties
The first supply of a new residential building within 3 years of its completion is zero-rated. This encourages real estate development and investment.
8. Supply of Crude Oil and Natural Gas
Supplies of crude oil and natural gas made by businesses registered for VAT are zero-rated under specific government agreements or when supplied to other registered businesses.
PEAK Business Consultancy Services: Helping You Apply Zero-Rating Properly
Correctly identifying and applying zero-rated VAT treatment requires careful documentation and understanding of FTA requirements. PEAK Business Consultancy Services offers expert VAT consulting to help UAE businesses claim zero-rating where applicable while avoiding penalties and disallowed input claims. Visit www.peakbcs.com for personalized VAT support and guidance tailored to your sector.
Conditions and Documentation for Zero-Rated Supplies
To apply the zero-rating, businesses must maintain proper supporting documentation. Examples include:
- Export documentation such as customs declarations, airway bills, or bills of lading.
- Proof of delivery or consumption outside the UAE for service exports.
- Licensing certificates for healthcare and educational institutions.
- Contracts for international transportation services.
Failure to maintain adequate records can lead to the denial of zero-rating and may attract fines during an FTA audit.
Differences Between Zero-Rated and Exempt Supplies
Understanding the difference is critical for VAT reporting and reclaiming input VAT:
| Aspect | Zero-Rated Supplies | Exempt Supplies |
|---|---|---|
| VAT Charged | 0% | None |
| Input VAT Recovery | Allowed | Not Allowed |
| VAT Registration Threshold | Included in turnover | Not included in turnover |
| Examples | Exports, education, healthcare | Life insurance, local public transport |
Common Mistakes in Applying Zero-Rated VAT
Many businesses make errors that can lead to fines or denial of input VAT claims:
- Incorrectly treating exempt supplies as zero-rated
- Failing to meet the documentation requirements
- Not verifying customer location or residence status for exported services
- Assuming all Free Zone supplies are zero-rated
To avoid these mistakes, periodic VAT health checks and compliance reviews are highly recommended.
Zero-Rating in Free Zones and Designated Zones
Supplies between Designated Zones, or from Designated Zones to overseas customers, may qualify for zero-rating. However, supplying goods to the UAE mainland from a Designated Zone is subject to the standard VAT rate.
Services provided in Designated Zones are still subject to VAT unless they meet specific zero-rating conditions.
How PEAK BCS Can Assist You
At PEAK Business Consultancy Services, we specialize in UAE VAT advisory services, including:
- Classifying your supplies for VAT treatment
- Preparing and maintaining correct documentation
- Assisting with FTA audits and clarifications
- Managing VAT returns with accurate zero-rated declarations
Ensure you’re not missing out on input VAT recovery or exposing your business to unnecessary risks. Connect with us now at www.peakbcs.com for a free VAT consultation.
Conclusion
Zero-rated supplies are a powerful feature of UAE VAT Law that supports key sectors and encourages trade while allowing businesses to recover input VAT. However, they come with specific conditions and documentation requirements that must be strictly followed.
For businesses looking to navigate these regulations correctly and confidently, professional guidance is essential. PEAK Business Consultancy Services provides end-to-end VAT support, ensuring your business remains compliant and efficient in utilizing the benefits of zero-rated VAT treatment. Visit www.peakbcs.com to get started today.
