VAT Exempt Supplies List: Definition, Examples & Complete Guide

VAT exemption in the UAE applies to a limited set of supplies defined strictly by law. These supplies are not subject to output VAT, but they block input VAT recovery, affect VAT registration thresholds and pricing decisions, and create greater compliance and audit exposure if misclassified.

Key takeaways

• VAT-exempt supplies are defined narrowly under UAE VAT law and cannot be extended by interpretation.
• No output VAT is charged on exempt supplies, but related input VAT is generally not recoverable.
• Exempt supplies are excluded from VAT registration threshold calculations, impacting registration obligations.
• Exempt supplies are fundamentally different from zero-rated supplies despite both carrying a 0% VAT rate.
• Key exempt categories include certain financial services, life insurance, residential leasing, bare land, and local passenger transport.
• Misclassification of exempt supplies is a major audit risk, especially in real estate, finance, and mixed-use businesses.

What are VAT-exempt Supplies?

VAT-exempt supplies refer to certain products or services that are wholly exempted by the UAE VAT law through which the taxation system is not charged. In the case of exempt supply, no VAT is due to the customer, regardless of whether the recipient is VAT-registered. In comparison to zero-rated supplies, VAT exemption does not permit recovery of input VAT on expenses incurred thereon. 

For businesses operating in Dubai, accurate interpretation of the VAT exempt supplies list Dubai carries heightened importance due to the emirate’s concentration of high-value real estate, financial services, and mixed-use commercial arrangements. Even minor misclassification between exempt, zero-rated, and taxable supplies can result in material VAT exposure. 

Complete VAT-Exempt Supplies List UAE

The VAT exempt supplies list UAE is defined under Federal Decree-Law No. 8 of 2017 and its Executive Regulations. The list of exempt supplies for VAT is intentionally narrow and applies only to clearly defined categories.

1. Certain financial services:

Most margin-based financial services qualify as VAT-exempt supplies because their consideration is implicit rather than charged as a visible fee. These services include:

• Granting of loans and credit facilities.
• Acceptance and management of deposits.
• Operation of current and savings accounts.
• Transfer or ownership of equity securities.
• Trading in bonds, sukuk, and similar debt instruments.

The exemption applies strictly to margin-based income, such as interest or spreads. Any financial service involving an explicit fee, commission, or charge is excluded from the VAT-exempt supplies list and is subject to VAT at the standard rate.

2. Life insurance and life reinsurance:

Life insurance contracts and life reinsurance are treated as VAT-exempt supplies under UAE VAT law. This exemption reflects the long-term, protective nature of life insurance products and aligns with international VAT principles.

Only life insurance qualifies for exemption. General insurance products, including motor, property, medical, and travel insurance, are taxable unless specifically zero-rated. 

3. Residential buildings:

The supply of residential buildings by way of lease or tenancy is a key component of the VAT exempt supplies list UAE. This exemption applies to:

• Long-term residential rental agreements
• Leasing of apartments, villas, and similar housing units
• Renewal and continuation of residential tenancy contracts

The exemption is designed to ensure affordability of housing and applies only where the property is used solely for residential purposes. Serviced apartments, hotel accommodation and short-term stays are excluded and remain taxable.

Importantly, the first supply of a newly constructed residential building within three years of completion is zero-rated, not exempt. 

4. Bare land:

Bare land refers to land that has not been developed or prepared for development. The supply of bare land qualifies as a VAT-exempt supply under UAE VAT law.

Land ceases to be bare land once any form of development, servicing or preparation occurs. This includes installation of utilities, construction of access roads, fencing or groundwork. Once development begins, the supply becomes taxable.

5. Local passenger transport:

Local passenger transport services provided within the UAE are classified as VAT-exempt supplies. This includes transport services provided by:

• Taxis
• Buses
• Metro systems
• Trams and similar public transport networks

Common Errors While Applying VAT Exemption

Despite clear rules, errors in applying the VAT exempt supplies list UAE remain widespread. Common mistakes include:

• Treating zero-rated supplies as VAT exempt.
• Recovering input VAT on costs solely linked to exempt supplies.
• Misclassifying serviced residential properties as exempt.
• Applying the exemption to fee-based financial services.
• Failing to segregate taxable and exempt income streams.

The table below highlights frequent errors and the correct VAT treatment.

Impact of Exempt Supplies on VAT registration

Exempt supplies have a direct impact on VAT registration obligations. When calculating whether a business has reached the mandatory VAT registration threshold, exempt supplies are excluded from the turnover calculation.

As a result, businesses generating revenue solely from VAT-exempt supplies may not be required to register for VAT. However, businesses with both taxable and exempt supplies must carefully monitor turnover to avoid registration failures or late registration penalties.

Once registered, businesses making exempt supplies may face restricted input VAT recovery, which can materially affect pricing and profitability.

Input VAT Recovery and Exempt Supplies

Input VAT recovery is the most significant operational consequence of VAT exemption. VAT incurred on expenses directly attributable to exempt supplies is non-recoverable.

Examples include:

• Maintenance and repair costs for residential rental properties.
• Legal and advisory fees related to exempt financial services.
• Operational expenses linked exclusively to exempt activities.

Where costs relate to both taxable and exempt supplies, businesses must apply apportionment methods that are fair, reasonable, and consistently applied. Incorrect apportionment is a frequent audit trigger.

Compliance and Documentation Requirements

Even though VAT is not charged on exempt supplies, businesses must maintain comprehensive records. Contracts, invoices, and accounting entries should clearly identify exempt supplies and reference the legal basis for exemption. 

• Contracts and invoices must clearly identify the supply as VAT exempt.
• Documentation should support eligibility under the VAT exempt supplies list UAE.
• Records must clearly distinguish exempt supplies from taxable and zero-rated supplies.
• Evidence should confirm residential use, bare land status, or exempt service nature.
• Input VAT related to exempt supplies should not be claimed.
• Records must be retained in accordance with the Federal Tax Authority's audit requirements.

VAT Treatment for Exempt, Zero-Rated and Taxable Supplies: Quick Reference

Conclusion

The list on VAT exempt supplies is a very restricted component of the UAE VAT. VAT exemption though, removes the output VAT, has severe implications on the input VAT recovery and makes compliance difficult.

Sustainable compliance is achieved through proper classification, strict documentation, and knowledge of the list of exempt supplies for VAT. Through the VAT-exempt supplies list, UAE businesses can minimise audit risk, maintain profits, and maintain business-wide tax efficiency in Dubai and the UAE.