The Decree-Law distinguishes between two categories of supplies that are not subject to the standard 5% rate: a zero-rated supply, which is originally a taxable supply but charged at a zero rate while retaining the right to deduct input tax, and an exempt supply, on which no tax is imposed and for which, in principle, related input tax cannot be recovered.
The Zero-Rated Supply
The Decree-Law provides that the supply and import of goods and services specified exclusively in its provisions, made by a taxable person, is a taxable supply subject to the zero rate. The most notable cases include:
- Direct or indirect export of goods and services outside the Implementing States, in accordance with what the Executive Regulation specifies.
- International transport of passengers and goods, and the supply of air, sea and land means of transport designated for this purpose.
- The first supply of residential buildings made within (3) three years of the date of completion of their construction, through sale or lease, whether whole or in part.
- The supply of crude oil and natural gas, and educational and basic healthcare services, in accordance with specified conditions.
The Exempt Supply
The Decree-Law limits the cases of exemption from tax to four cases: the supply of financial services specified by the Executive Regulation, the supply of residential buildings through sale or lease except where the zero rate applies, the supply of bare land, and the supply of local passenger transport services.
The Essential Difference Between the Two Categories
The essential difference between the zero rate and an exemption lies in the right to deduct input tax; a registrant making zero-rated supplies retains the right to recover input tax related to those supplies because they remain, in principle, taxable supplies, whereas an exempt supply does not grant this right except under exceptional provisions expressly stated in the Decree-Law.
A Supply Made Up of More Than One Component
A single supply may include more than one component for a single price, where each component is subject to a different tax treatment, for example one component subject to the standard rate and another subject to the zero rate or an exemption. In this case, the Executive Regulation of the Decree-Law specifies the rules for determining the tax treatment to be applied to this type of composite supply.
Illustrative Example
Illustrative example: a business exporting goods outside the Implementing States applies the zero rate to that export, so it does not charge tax to the buyer but retains the right to deduct input tax related to those goods, unlike a business leasing bare land, which is an exempt supply from the outset with no tax charged on the rental value.
Legal References
- Federal Decree-Law No. (8) of 2017 on Value Added Tax — Article (44), Article (45) and Article (46)
For questions about your specific situation, you can ask the UAE Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.