About the Author
Mohamed Al Sayed is a Tax Agent with more than eight years of experience within the tax & accounting industry. Accredited by the United Arab Emirates Federal Tax Authority (FTA), Mohamed has successfully demonstrated his ability to resolve complex tax problematics for companies coming from various industries. He is often solicited to participate in workshops and give lectures on tax-related topics. He is currently the Tax Agent and expert of VAT in UAE for Creative Zone Tax & Accounting.
In this article, he briefly explains what’s the Value Added Tax (VAT), details the criteria for a taxable supply, and concludes with the different types of VAT and their respective applicable rates.
I’ve been thinking about writing an article about the “types of VAT” for a while. I regularly receive questions like “Do I have to apply VAT on this transaction?” or “Which rate should I use for this item?”. As a Tax Agent, I wish to make things very clear from the beginning: You will never get a definitive answer to VAT-related questions by reading a sole article. It took several years of study for professionals to be able to apprehend all the subtility of VAT understanding.
However, I believe you will find all the necessary information about the different types of VAT which can be applied or not on your transactions. I’ve voluntarily used simple wording, but I have to warn my readers that some parts are related to legal information and hence, must be very accurate and can be a bit technical. Let’s deep dive into the types of VAT in UAE.
In the UAE, there are two VAT rates applicable: The standard rate of 5% and the zero rate of 0%. We can also find supplies exempted from VAT. Although VAT is not accounted for in respect of both zero-rated and exempt supplies, there is an important distinction between the two.
Let me first introduce you to some basics about VAT.
What Is Value Added Tax (VAT)?
Value-added tax (VAT) refers to a type of indirect tax that is imposed on the supply of most goods and services. The VAT is charged and collected at each stage of the supply chain. It is generally the final consumers who bear the VAT cost while businesses collect and account for the tax.
What Is A Taxable Supply?
Most business transactions are based on the supply of goods or services.
To be taxable, some conditions would generally need to be met. Hence, the supply:
- Should be a good or service;
- Need to be done for a consideration;
VAT may be charged at either the 5% standard rate or the 0% rate for taxable supplies. As mentioned earlier, some supplies are exempted from VAT and hence, are not considered as taxable supplies.
Let’s see now what types of VAT exist in UAE.
The 3 Types of VAT
Depending on the nature of supplies, UAE VAT can be classified into three major categories:
Standard Rated VAT
A 5% VAT rate is applicable to the supply & import of most of the goods & services in the UAE. The law states that when a business is registered for VAT and VAT is charged at the standard rate, the company may be entitled to recover the VAT charged by its supplier. However, certain conditions must be followed.
The VAT is not accounted for on zero-rated supplies (since the applicable rate is 0%), but such supplies are still treated as “taxable supplies” in all other respects. As a result, the person making the supply has the right to recover the VAT incurred on their own business expenditure in the same way as they would if they made standard-rated supplies.
According to Article (45) of. The Federal Decree no. 8 of 2017 on VAT, the zero rate shall apply to the supply of the following goods & services:
- A direct or indirect Export of goods & services to outside the Implementing States.
- International transport of passengers and Goods which starts or ends in the State or passes through its territory, including Transport-related Services.
- Supply of air, sea, and land means of transport for the transportation of passengers and Goods
- Supply of Goods and Services related to the supply of the means of transport mentioned above and which are designed for the operation, repair, maintenance, or conversion of these means of transport.
- The first supply of residential buildings within (3) years of its completion
- Supply of aircrafts or vessels designated for rescue and assistance by air or sea.
- The supply or import of investment precious metals
- The supply of preventive and basic healthcare Services and related Goods and Services
- The supply of educational services and related Goods and Services for nurseries, preschool, school education, and higher educational institutions owned or funded by Federal or local Government
- The first supply of buildings specifically designed to be used by Charities
- The first supply of buildings converted from non-residential to residential
For a better understanding of your business circumstances, it is necessary to consult an accredited tax agent who can guide you.
Supplies exempt from VAT
Products and services in this category are not subject to VAT. It means they do not incur VAT charges at the time of purchase or sale.
In addition, businesses which are in the business of making mixed supplies with varying VAT liability will have to apportion VAT incurred on general costs.
According to Article (46) of. The Federal Decree no. 8 of 2017 on VAT, the following supplies are exempt from VAT:
- Financial services which are not conducted for an explicit fee, discount, commission, rebate or similar type of consideration, such as life insurance and reinsurance of life insurance.
- Residential buildings, other than the residential buildings which are specifically zero-rated.
- Bare Land.
- The local passenger transport.
To sum up, instead of speaking about “types of VAT”, I would rather categorize the supplies into two: The taxable supplies which are 5% standard rated or 0% rated, and the exempted supplies which are not taxable in the UAE with all consequences mentioned above.
A specific point should be mentioned here: If you are looking to register for VAT, you would generally include the following to consider the VAT registration threshold: Supplies taxable at standard 5% rate, supplies taxable at zero rate, and the import of goods and services. However, keep in mind that you’ll never include exempt supplies.
I hope this article gave you a clear and concise overview of the VAT regime in the UAE. As a final word, I wish to reiterate my very first warning about the understanding of VAT: If you are not an expert, please do not try to take care of your VAT on your own. It’s a complicated topic that involves several constantly evolving legislations. It requires very specific knowledge and, I dare to believe, an ounce of passion. Thank you for reading.