What Constitutes VAT Exempt Supplies in the UAE?
Exempt supplies in the context of UAE’s Value Added Tax (VAT) refer to the provision of goods or services for consideration during business operations in the state, where no tax is applicable, and input tax recovery is only allowed in accordance with the provisions of the Decree-Law. Simply put, certain goods and services specified in the UAE executive regulations are exempt from VAT, meaning that no VAT is imposed on the supply of these items.
However, businesses that supply these exempted goods or services are not eligible to claim input tax refunds on their purchases. For example, if you purchase raw materials incurring a 5% VAT and subsequently use these materials to produce goods that fall under the exemption category, you cannot recover the 5% input VAT paid on your purchases, and it is treated as a cost of the product.
“Catalog of Goods and Services Exempt from Taxation in the United Arab Emirates”
VAT exemptions in the UAE apply to a range of goods and services, including financial services, residential buildings, bare land, and local passenger transport, among others. Nevertheless, specific conditions outlined in the UAE VAT Act and Executive Regulations must be met to classify a supply as VAT-exempt. Here is a breakdown of some of the exempted categories:
Under VAT exemption, the following financial services are included:
1. Financial services not provided for a specific fee, discount, commission, rebate, or similar compensation.
2. Issuance, allocation, or transfer of equity securities or debt securities.
3. Provision or transfer of ownership of a life insurance contract or reinsurance for such contracts.
To determine whether an activity or service qualifies as a financial service, the UAE VAT Executive Regulation doesn’t provide a comprehensive definition but rather lists examples, which include services connected to monetary transactions, credit provision, currency exchange, loans, deposits, savings accounts, and more. Notably, not all financial services are exempt; if any of these services involve a specific fee, commission, discount, rebate, or similar compensation, they become taxable.
The supply of residential buildings is exempt from VAT under the following conditions:
1. The lease period exceeds 6 months, or
2. The tenant holds an ID card issued by the Emirates Identity Authority.
The lease period mentioned above encompasses both the contractual tenancy duration and any extensions or renewals.
“Residential buildings” refer to structures intended for human habitation, including primary residences, student accommodations, armed forces and police residences, orphanages, nursing homes, and rest homes.
Non-residential accommodations, on the other hand, do not fall under the residential building category and are subject to a 5% VAT rate. This includes movable structures, hotels, motels, bed and breakfast establishments, hospitals, and serviced apartments offering additional services beyond accommodation.
“Bare land” refers to land devoid of complete or partially constructed buildings or civil engineering works.
Local Passenger Transport Services
The supply of local passenger transport services via land, water, or air from one place in the UAE to another is exempt from VAT. This applies to various modes of transport, including motor vehicles, buses, trains, trams, ferry boats, abra, and other passenger vessels. Helicopters and airplanes designed for passenger transport and approved by the Civil Aviation Act are also exempt.
However, VAT at the standard rate of 5% is applicable to local passenger transport services that constitute pleasure trips or fall under “international carriage” as defined in the UAE executive regulations.
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