Exempt Supply

What is an Exempt Supply?

An Exempt Supply is a supply of goods or services that is outside the scope of VAT. No VAT is charged on exempt supplies, and importantly, the supplier cannot recover input tax on expenses related to making exempt supplies. This creates a real cost for businesses making exempt supplies.

Categories of Exempt Supplies

1. Financial Services

• Issuance and transfer of securities
• Granting and transfer of loans
• Provision of credit facilities
• Life insurance and reinsurance
• Interest-based transactions (except explicit fees)

2. Residential Property

• Sale of residential buildings (except first supply)
• Leasing of residential buildings
• Supply of bare land

Note: Commercial property is subject to standard 5% VAT

3. Local Passenger Transport

• Public buses and metro services
• Local taxi services
• Transport within UAE borders

Note: International transport is zero-rated

4. Bare Land

Sale or lease of land without buildings or structures

Impact on Input Tax Recovery

The key disadvantage of exempt supplies:

No Input Tax Recovery

Businesses making exempt supplies cannot recover VAT paid on purchases and expenses related to those exempt supplies. This VAT becomes a real business cost.

Partial Exemption

When a business makes both taxable and exempt supplies, it can only recover input tax proportional to taxable supplies:

Recoverable % = Taxable Supplies / Total Supplies × 100

Example: A bank with AED 90M taxable supplies and AED 10M exempt supplies can recover 90% of input tax on general overhead expenses.

Exempt vs Zero-Rated

Exempt

• No VAT charged
• Not subject to VAT
• Cannot recover input tax
• VAT is a real cost
• Don't count toward VAT registration threshold

0% Rated

• No VAT charged
• Taxable at 0%
• Can recover input tax
• VAT refunds possible
• Count toward VAT registration threshold

Specific Exempt Services

Financial Services (Exempt)

Exempt:

• Interest on loans
• Stock trading
• Insurance premiums
• Money transfers

Standard-Rated (5%):

• Account maintenance fees
• ATM fees
• Financial advisory
• Credit card annual fees

Residential Property Rules

Transaction	VAT Treatment
First sale of new building (within 3 years)	Zero-Rated (0%)
Subsequent sales of residential property	Exempt
Residential leasing/rent	Exempt
Commercial property sale/lease	Standard (5%)

Reporting Exempt Supplies

Exempt supplies are reported in Box 4 of VAT Return Form 201. While they don't generate Output Tax, they affect input tax recovery calculations for businesses making both taxable and exempt supplies.