Exempt supply: what it means in UAE tax.
The meaning of exempt supply under UAE VAT law: how it works, a worked example in AED, common mistakes and the legal references.
An exempt supply carries no UAE VAT, but the supplier cannot recover the input tax on costs that relate to it. Residential rent is a common case.
What exempt supply means
Also called: VAT exempt supply.
An exempt supply is a supply made in the course of business in the UAE on which no VAT is charged and on which the related input tax cannot be recovered, except where the law says otherwise. The customer pays no VAT, but the VAT the supplier pays on its own costs becomes a real cost.
The VAT law lists four exempt categories: specified financial services, residential buildings sold or leased (other than zero-rated first supplies), bare land, and local passenger transport. The Executive Regulation sets the details, for example which financial services are exempt and what counts as qualifying passenger transport.
For SMEs, the most common exposure is a business that makes both taxable and exempt supplies, such as a landlord with residential and commercial units. Input tax must then be split, and only the part linked to taxable supplies can be deducted. Exempt supplies do not count towards the VAT registration threshold.
How it works
- Do not charge VAT on an exempt supply and do not issue a tax invoice for it.
- Input tax on costs used only for exempt supplies cannot be deducted.
- Input tax on shared costs is apportioned between taxable and exempt supplies under the Executive Regulation.
- Financial services are exempt only where they fall within the regulation's list; fee-based financial services are generally taxable.
- Exempt supplies are reported in the VAT return but are left out when testing the registration threshold.
Worked example
A family-owned company leases flats in one building and shops in another, and files quarterly VAT returns.
| Residential rent (exempt) | AED 240,000 |
| VAT on residential rent | AED 0 |
| Commercial rent before VAT | AED 160,000 |
| Output tax at 5% on commercial rent | AED 8,000 |
| Input tax on residential building maintenance (not recoverable) | AED 3,000 |
| Input tax on shop building maintenance (recoverable) | AED 1,000 |
| Payable tax for the quarter | AED 7,000 |
The AED 3,000 of VAT on the residential block is a cost because it relates to exempt rent.
Common mistakes
- Confusing exempt with zero-rated and claiming input tax on costs linked to exempt income.
- Charging VAT on residential rent, then having to pay that VAT to the FTA anyway.
- Recovering all VAT on shared overheads without apportioning between taxable and exempt activity.
The law
- Federal Decree-Law No. 8 of 2017 on Value Added Tax, Article 1 (definition of Exempt Supply), Article 46 and Article 54
- Cabinet Decision No. 52 of 2017 (Executive Regulation of the VAT law), Articles 42, 43, 44, 45 and 55
Frequently asked questions
Can a business with only exempt supplies register for VAT?
Registration is tied to taxable supplies and certain imports and expenses. A business that makes only exempt supplies does not meet the mandatory threshold on those sales.
Is commercial rent exempt?
No. The exemption covers residential buildings and bare land. Rent on offices, shops and warehouses is standard-rated.
Related terms
Zero-rated supply · Taxable supply · Input tax · VAT registration threshold. See every term in the UAE tax glossary.
For the full picture, read our guide: Corporate Tax and VAT for Real Estate Businesses in the UAE.
Need help with VAT returns? See our VAT returns service.
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