Exempt supplies are defined as the supply of services and goods while doing business in a specific region, where no taxes are levied/due on the same and no input taxes may also be recovered excepting provisions of the Decree Law. In simpler terms, exempt supplies are those goods or services notified in the UAE law where VAT is not charged/imposed on supply of the same. At the same time, companies supplying goods/services which are exempted, will not be allowed to claim any input taxes paid on purchases.
Suppose, VAT of 5% has been paid on the purchase of any particular raw materials although VAT is exempted on the finished good that is manufactured in this case. You cannot claim this input VAT of 5% that you have paid on the purchase since it will not be considered as the cost of the product. Exemptions are given for a wide variety of goods and services in the UAE.
VAT Exempt Supplies for the UAE
- Financial Services- These include financial services which are not executed in return for explicit discounts/fees/commission/rebates or any returns. This section also covers the allotment/issue/transfer of ownership for any equity based security or debt security along with the provision of ownership transfer of a life insurance contract or the provision of re-insurance with regard to any such contract. The authority has clearly defined financial services as services which are linked to monetary dealings or their equivalent and credit provisions. Exchange of currency issue or provision of any advance, loan or credit have also been defined accordingly along with operating any deposit, current or savings account. However, if any financial service is conducted in return for a fee then it does not remain VAT exempted.
- Residential Buildings- Supply of residential structures is exempted from VAT although there are specific conditions, i.e. the lease should be more than a period of 6 months or the tenant of the particular property should be an ID card holder with the ID card issued by the Emirates Identity Authority. The tenancy period will be identified with reference made to the tenancy contractual period and this will include options for extension of the tenancy period or renewal of tenancy. Residential buildings here indicate buildings which have been designed and intended for human habitation. This includes principal residences, residential accommodation for students, police, armed forces and the like, nursing homes, rest homes and orphanages among other categories. All residential accommodation remains exempted from VAT.
Accommodations which are not considered for VAT exemption
Now, there are some accommodations which are not considered as residential for greater clarity:
- Anything that is not a building that remains fixed to the ground and can be easily moved without damages.
- Any building used as a motel, hotel, bed and breakfast organization or as a hospital among other commercial purposes.
- Any serviced apartment where services and accommodation supply are provided to customers.
- Any building that has been converted or constructed with proper lawful permissions from the authority.
In all the above scenarios, 5% VAT will have to be paid.
Other goods/services exempted from VAT
Bare Land is exempted from VAT and this refers to land that has not been covered by structures (either fully or partially finished) or even civil engineering work. Supply of local passenger transport services across water, land or air from one place in the State to another will remain exempted from VAT. Transportation including taxis, buses, trains, trams, ferry boats, monorail networks, abra or similar vessels and other transportation remains exempted from VAT along with aeroplanes or helicopters designed for transporting passengers as per the Civil Aviation Act.
Local passenger transportation in contexts relating to trips for pleasure or leisure or even local transportation by aircraft for international carriage as specified in the UAE executive regulations, will not have any exemptions from VAT and 5% VAT will continue to be imposed on the same.
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