Zero-Rated vs Exempt Supplies in UAE VAT: Key Differences

Zero-rated supplies stay taxable at 0% and let you recover input VAT; exempt supplies don't. See the Article 45 and 46 lists, with examples and traps.

8 November 2026Qawi7 min read

Key takeaways

A zero-rated supply under UAE VAT is still a taxable supply, charged at 0%, so the supplier can recover VAT paid on related costs.
An exempt supply under UAE VAT is outside the tax: no VAT is charged and the supplier cannot recover VAT on the costs tied to it.
Zero-rated supplies are listed in Article 45 of Federal Decree-Law No. 8 of 2017 and exempt supplies in Article 46; the lists are different, and neither is a matter of choice.
Zero-rated turnover counts towards the AED 375,000 mandatory VAT registration threshold, while a business making only exempt supplies isn't required to register.
A business making both exempt and taxable supplies must split its input VAT, and the apportionment method is being refined by Cabinet Decision No. 149 of 2026.

What is the difference between zero-rated and exempt supplies in UAE VAT?

Zero-rated and exempt supplies both carry no VAT on the invoice, but they are treated differently in your VAT account. A zero-rated supply is taxable at 0%, so you report it on your return and recover the input VAT on your costs. An exempt supply isn't taxable at all, so you report nothing as output and lose the input VAT linked to it.

	Zero-rated (Article 45)	Exempt (Article 46)
VAT charged to the customer	None (0% rate)	None
Counts as a taxable supply	Yes	No
Input VAT on related costs	Recoverable, subject to the normal conditions	Not recoverable
Counts towards the AED 375,000 registration threshold	Yes	No
Reported on a VAT return	Yes, if you are registered	No return needed if all your supplies are exempt

Source for the table: UAE Government guidance on zero-rated and exempt supplies, checked 8 November 2026.

Which supplies are zero-rated in the UAE?

Zero-rated supplies are a fixed list in Article 45 of Federal Decree-Law No. 8 of 2017, and each category carries conditions set in the law and the Executive Regulation (Cabinet Decision No. 52 of 2017). The UAE Government guidance lists these categories:

exports of goods and services
international transport of goods and passengers
certain means of transport, such as trains, trams, vessels and aircraft
the first sale or rent of residential buildings
aircraft or vessels designated for rescue and assistance by air or sea
certain investment precious metals
certain healthcare services and related goods and services
certain educational services and related goods and services

The word "certain" matters: a clinic or school doesn't get zero-rating for everything it sells, only for the services and goods the law names. The FTA states that the first supply of a residential property, by sale or lease, within 3 years of its completion is zero-rated (checked 8 November 2026).

Which supplies are exempt from UAE VAT?

Exempt supplies are listed in Article 46, and the FTA applies them strictly because they are exceptions to the general rule. The UAE Government guidance gives these examples:

certain financial services, including life insurance and reinsurance of life insurance, and financial services provided without an explicit fee or similar consideration
residential buildings, other than those that are zero-rated
bare land
local passenger transport

So a landlord renting out a residential building that is more than 3 years past completion makes an exempt supply, while a developer making the first sale within 3 years makes a zero-rated one. Same type of property, different VAT position, and the difference decides whether input VAT on construction or maintenance costs can be recovered.

How do zero-rated and exempt supplies affect VAT registration?

Registration depends on taxable turnover, and taxable turnover includes zero-rated supplies. You must register once your taxable supplies and imports exceed AED 375,000 in the previous 12 months or are expected to exceed it in the next 30 days; voluntary registration opens at AED 187,500 (FTA, checked 8 November 2026).

AED 375,000: mandatory VAT registration threshold, measured on taxable supplies, including zero-rated ones. Source: FTA VAT guidance and Federal Decree-Law No. 8 of 2017, checked 8 November 2026.

Exempt supplies don't count towards that threshold, and a business whose supplies are all exempt isn't required to register. The FTA also allows an exception from registration for a business that makes only zero-rated supplies (nothing at 5%), but if it is granted you file no regular returns and can't recover input VAT. For a business with real costs, that exception usually loses more than it saves. If you'd rather not track these dates by hand, the free UAE compliance calendar lists your company's VAT and other deadlines.

How is input VAT handled when you make both exempt and taxable supplies?

If you make both taxable and exempt supplies, you can recover input VAT only on the part that relates to taxable supplies. Costs that serve both sides, such as rent for an office, have to be apportioned. The FTA says to start with the ratio of recoverable input VAT to total input VAT, and other methods are allowed if agreed with the FTA.

Two recent changes affect this, so date them in your own file:

Change	What it does	Date
Federal Decree-Law No. 16 of 2025	Sets a five-year limit to reclaim excess refundable VAT; lets the FTA deny input VAT linked to an evasion arrangement; ends self-invoicing for reverse charge	In force from 1 January 2026
Cabinet Decision No. 149 of 2026	Refines input VAT apportionment; adds rules on composite supplies, cash payments and employee accommodation	Announced by the Ministry of Finance on 8 September 2026; effective dates by provision, so check the decision text

A partially exempt business should document its apportionment method and apply it the same way each year. A method that changes whenever the numbers look better is hard to defend at an FTA audit.

What most guides don't tell you

Misclassifying a zero-rated supply as exempt costs you money twice. If you treat a zero-rated sale as exempt, you stop recovering input VAT you were entitled to, and you may also skip a registration you owed because the turnover should have counted. The reverse mistake, treating an exempt supply as zero-rated, means you recover VAT you weren't entitled to, and that creates an underpayment the FTA can assess.

Free zone status doesn't make a supply zero-rated. A sale to a company in a free zone is zero-rated only if the law's conditions are met, for example as an export or a supply within a designated zone. Many free zones aren't designated zones for VAT, so check the FTA's list before you invoice without VAT.

Zero-rating needs paperwork, not just a rule. The conditions for exports sit in the Executive Regulation, and the FTA can test them when it audits a return or a refund claim. Keep the invoice, contract and the shipping or service evidence together for each zero-rated sale.

An exempt business that crosses into taxable activity can trigger registration without noticing. Say a landlord with only residential rent adds a short-term serviced office line billing AED 400,000 a year (a hypothetical example). The new line is taxable, and once taxable turnover passes AED 375,000 the company must register, then start apportioning input VAT across both activities.

Which VAT deadlines apply to your company?

Whether your supplies are zero-rated, exempt or standard-rated, they all sit on the same filing and payment calendar. The free UAE compliance calendar lists your company's UAE tax and compliance deadlines, personalised from a few questions, as a PDF and calendar file.

Frequently asked questions

Are exports zero-rated for UAE VAT?

Yes, exports of goods and services are on the zero-rated list in Article 45 of Federal Decree-Law No. 8 of 2017, but only where the conditions in the law and its Executive Regulation are met. Keep your export evidence, because the FTA can ask for it when it reviews a return.

Is VAT charged on services to foreign clients?

Not automatically either way: a service to a client abroad can be zero-rated as an export, but the client's location alone doesn't decide it. The conditions in the Executive Regulation do, so check them before you issue an invoice without VAT.

How does the reverse charge mechanism work in the UAE?

Under the reverse charge, the buyer accounts for the VAT on a purchase instead of the supplier charging it. Since 1 January 2026, Federal Decree-Law No. 16 of 2025 removes the need to issue a self-invoice for these supplies, but you must keep the supporting documents the Executive Regulation specifies.

Do I charge VAT to a free zone company?

It depends on whether the customer sits in a designated zone and on what you are supplying. A free zone licence by itself doesn't remove VAT, so confirm the zone's status in the FTA's designated zones guide before you invoice.

What is a designated zone for VAT?

A designated zone is an area specified in a Cabinet Decision where certain supplies of goods are treated differently for VAT than on the mainland. Not every free zone is a designated zone, and the FTA publishes the list and a guide (TAXP010, issued October 2026).

About Qawi · Qawi is a corporate services firm licensed in the Sharjah Media City (SHAMS) free zone, handling company formation, visas and PRO, bookkeeping, VAT and corporate tax for UAE businesses. Guides are researched from FTA, Ministry of Finance and free zone sources. Qawi on LinkedIn

Sources

Last checked: 8 November 2026

This is general information, not tax or legal advice for your specific situation.