VAT exemption means a supply of goods or services is not subject to VAT — and the supplier cannot recover input VAT on costs related to that exempt supply. This differs from zero-rating, where no VAT is charged but input VAT can still be reclaimed.
Under UAE VAT law, the following are exempt: financial services (debt issuance, life insurance, fund management in certain forms), residential property after the first supply (subsequent leases and sales of residential buildings), bare land, and local passenger transport.
If a business makes both taxable and exempt supplies, input VAT must be apportioned — only the portion attributable to taxable activities is recoverable. This partial exemption calculation must be applied on each VAT return.
Zero-rated is a taxable supply — input VAT is fully recoverable. VAT-exempt is not a taxable supply — input VAT on related costs is a permanent business cost. This distinction has significant cash flow impact.
For businesses with mixed supplies — property companies, financial services firms — Finanshels calculates the correct input VAT recovery percentage per return. See our VAT services.
