Value Added Tax (VAT) is a form of consumption tax imposed on the added value to goods and services at each stage of production or distribution. In the United Arab Emirates (UAE), VAT is set at a standard rate of 5%. However, specific goods and services either fall under a zero-rated or exempt category. This article will delve into the distinction between zero-rated VAT and exempted VAT, providing examples for each.
Zero-Rated Supplies in UAE
Zero-rated supplies encompass goods and services that are subject to VAT but taxed at a 0% rate. This differs from exempt supplies, which are not taxable for VAT purposes and do not allow for VAT recovery. For businesses engaged in qualifying commercial activities under this classification, zero-rated supplies enable them to reclaim the VAT paid on their expenses. The UAE VAT law outlines certain goods and services falling under the zero-rated tax category. Examples of zero-rated goods and services in the UAE include:
- Exports of goods and services
- International transport of goods and passengers
- Certain means of transport, such as trains, trams, vessels, and aircraft
- First sale of residential buildings
- Certain investment precious metals
- Certain healthcare services and related goods and services
- Certain educational services and related goods and services
Zero-rated VAT is beneficial for businesses that deal in these goods and services as they can claim a refund for the VAT paid on their inputs, which can help reduce their costs and improve their cash flow. It is important to note that businesses must obtain a Commercial Activities Certificate and register for VAT if their taxable supplies exceed AED 375,000 in a 12-month period.
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| Aspect | Zero Rated VAT | Exempted VAT |
|---|---|---|
| Definition | Goods/services taxed at 0% VAT | Goods/services not subject to VAT |
| VAT Registration Requirement | Required for businesses | Not required for specific exempt items |
| Input VAT Recovery | Recoverable | Not recoverable |
| Examples | Exported goods, certain food items | Financial services, residential rentals |
| Impact on Business | Can claim input VAT on purchases | Cannot claim input VAT on purchases |
| VAT Returns | Must be included | Excluded from VAT returns |
UAE VAT Exemptions
Exempted VAT is a category of VAT that is not subject to tax. This means that VAT is not charged on the sale or purchase of these goods and services, and businesses cannot claim a refund for the VAT paid on their inputs. Examples of exempted goods and services in the UAE include:
- Financial services, including life insurance and reinsurance of life insurance, as well as financial services that are not conducted for an explicit fee, discount, commission, rebate, or similar type of consideration
- Residential buildings, other than the residential buildings which are specifically zero rated
- Bare land
- Local passenger transport
Unlike zero-rated VAT, businesses that deal in exempted goods and services cannot claim a refund for the VAT paid on their inputs. This can make it more difficult for these businesses to manage their costs and cash flow. It is important to note that businesses must still register for VAT if their taxable supplies exceed AED 375,000 in a 12-month period, even if they only deal in exempted goods and services.
Claim a Refund for the VAT Paid Outside the UAE
In certain circumstances, businesses registered for VAT in UAE can claim a refund for the VAT paid on goods and services acquired outside the UAE. The following are the conditions that must be met to claim a refund:
- The business must be registered for VAT in UAE.
- The goods or services acquired must be used for making taxable supplies in the UAE.
- The business must hold a valid Commercial Activities Certificate.
- Maintain proper documentation such as invoices showing the VAT amount.
- The business must submit a claim for refund within six months from the end of the tax period in which the VAT was incurred.
Zero Rate Corporate Tax Vs. Zero Rated VAT UAE
Zero rate corporate tax and zero-rated VAT in UAE are two different concepts. Zero rate corporate tax refers to the absence of federal corporate income tax on businesses in the UAE, except for specific sectors such as oil and gas, banking, and insurance. On the other hand, zero rated VAT applies to certain goods and services that are still considered VAT taxable but are subject to a 0% tax rate. This means that while suppliers do not charge VAT on zero rated supplies, they can still recover any input tax incurred on expenses related to these supplies. zero rated VAT is designed to minimize the tax burden on businesses involved in the export of goods and services or other qualifying activities. Zero-rated goods are tax-exempt at the point of sale, allowing producers to claim a credit for the VAT paid on their inputs. In contrast, exempt goods are also not taxed at sale, but producers cannot claim a credit for the VAT paid on their inputs.
Consultant Top Tax Consultants in UAE
In summary, zero-rated VAT and exempted VAT represent distinct categories applicable to specific goods and services in the UAE. Businesses must comprehend the disparities between these VAT classifications and adhere to the pertinent regulations. Seeking advice from seasoned tax agents in the UAE can offer valuable insights and support in navigating the complexities of the VAT system. Their expertise enables businesses to enhance their tax positions, streamline compliance processes, and ultimately enhance their overall success in the UAE market. Thus, contact us today and we shall be glad to assist you.