A Comprehensive Guide to the VAT Rate in the UAE

All you need to know about value-added tax in the UAE: what is its rate? And what business is it imposed on? Also, learn about the sectors that are exempt from VAT in the UAE

A Comprehensive Guide to the VAT Rate in the UAE
2023-03-22 Last update 2023-04-26

A Comprehensive Guide to the VAT Rate in the UAE

Are you a business owner or consumer in the UAE looking to understand the Value Added Tax? The UAE Value Added Tax was introduced on January 1, 2018, at a standard rate of 5%. The VAT system is a consumption tax that is levied on most goods and services bought and sold within the UAE. VAT is collected by businesses on behalf of the government and is payable by the end consumer. With the most recent information and essential details you should be aware of, we'll present a thorough overview of the UAE VAT rate in this article.

What Is a Value-Added Tax?

A value-added tax is a consumption tax that is applied to the value added to goods and services at each stage of production and distribution. Unlike a sales tax, which is levied on the final sale of a product or service, a VAT is collected at each stage of production and distribution, with businesses collecting VAT on behalf of the government and remitting it to tax authorities.

In other words, a tax on the consumption or use of products and services is known as a value-added tax or VAT. At the point of sale, a 5% VAT is charged. For the benefit of the government, businesses collect and account for tax payments. 

The Difference Between VAT and Sales Tax

Like VAT, a sales tax is a type of consumption tax. There are some significant distinctions between the two forms of taxes, even if there may not be a noticeable difference for the average person. Sales taxes are frequently exclusively levied on transactions involving tangible objects in many nations. Moreover, sales tax is only levied on final consumer transactions. In contrast, VAT is levied on products and services and is collected at every point along the supply chain, including the point of sale. In order to preserve a level playing field for domestic suppliers of the same goods and services, VAT is also levied on imported goods and services.

Are VAT and Sales Tax the Same?

For a variety of reasons, VAT is preferred by many nations over sales taxes. Furthermore, it is also viewed as a more sophisticated kind of taxation since it requires companies to act as tax collectors on behalf of the government and reduces tax fraud and evasion.

Sales taxes are only paid once when the finished product is sold to consumers, whereas VATs can be charged at any point along the production chain. Because it generates more income, most governments favor collecting VAT over sales tax.

VAT Laws in the UAE

On Which Businesses Does VAT Apply?

Value Added Tax generally applies to most businesses that sell goods or services. The specific rules regarding VAT can vary depending on the country, but in general, if a business is engaged in a taxable activity and exceeds a certain threshold of turnover or sales, it must register for VAT and charge VAT on its sales.

Tax-registered firms run both on the UAE's mainland and in free zones are subject to Value Added Tax. However, if the UAE Cabinet designates a specific free zone as a "designated zone," it must be recognized as being outside the UAE for taxation purposes. Goods can be moved tax-free between specified zones.

You may also want to read about: UAE Income Tax Explained.

What Are the Registration Criteria for VAT?

  1. If a company's annual taxable imports and supplies total more than AED 375,000, it must register for Value Added Tax.
  2. For companies with annual supplies and imports of more than AED 187,500, it is optional.
  3. A company pays the government the tax it receives from its clients. The government also reimburses it for the tax it paid to its suppliers at the same time.
  4. Also, foreign companies can get their Value Added Tax back when they travel to the UAE.
VAT laws in the UAE

How Is a Value-Added Tax Collected?

  • The Value Added Tax is paid by customers in the form of a 5% price rise on taxable goods and services they buy in the UAE. VAT-registered businesses collect the money on behalf of the government.
  • At each stage of the supply chain, the UAE applies VAT at a rate of 5% on taxable supplies of goods or services on tax-registered firms.
  • VAT is also charged at the point of sale to visitors in the UAE.
You may also want to read about: Corporate Taxation In The UAE.

What Sectors Are Exempt from VAT in the UAE?

In the UAE (United Arab Emirates), some sectors are exempt from Value Added Tax while others may have specific rules or rates that apply. Here are some of the sectors that are exempt from this tax in the UAE:

With relation to the following primary categories of supplies, Value Added Tax shall not be appraised:

  • Goods and service exports beyond the GCC
  • Transportation internationally and related materials
  • Supply of certain land, sea, and air vehicles, including ships and aircraft
  • Many investment-grade precious metals, such as 99% pure gold and silver
  • Residential properties that have just been built and are made available for the first time within three years
  • The provision of specific educational or healthcare services and the provision of pertinent goods and services

Moreover, the following types of supplies will not be subject to sales tax:

  • The provision of some financial services (clarified in VAT legislation)
  • Residential buildings
  • Empty land
  • Local passenger transportation

What Sectors Are Partially Exempt from VAT in the UAE?

When a registered person makes supplies, an expense may be related to both taxable and non-taxable supplies (such as activities of the banking sector). The registered person would have to divide the input tax between the taxable and non-taxable (exempt) supplies in this situation. Although there will be the option to apply other techniques where they are just and have been agreed upon with the Federal Tax Authority, businesses will be expected to utilize input tax (ratio of recoverable to total) as a basis for apportionment in the first instance.

VAT in Real Estate

Whether the real estate is a commercial or residential property determines how the VAT is applied. Commercial real estate services are taxable at the usual VAT rate (i.e., 5%) on all supplies, including sales and leases.

Let Imtilak Global Handle Your Legal Matters for Real Estate in Dubai

Imtilak Global can handle your VAT tax matters. You don't have to worry about navigating the complexities of VAT tax on your own because we provide comprehensive legal services to handle every aspect of your property as a full-service real estate provider in Dubai.

Edited by Imtilak Global ©

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