If you’re setting up a business in the UAE or already running one, chances are you’ve heard about VAT (short for “Value Added Tax”).
It’s one of those terms that shows up often in business conversations, accounting reports, and government forms.
But despite being just 5%, VAT can be confusing if you’re new to it. In this guide, we’ll talk about all the essentials of VAT in the UAE.
And don’t worry!
We won’t bore you with legal jargon. Instead, we’ll keep things simple, so that you get a clear picture of what’s involved and what’s not.
By the time you’re done reading, you’ll understand how VAT works, how to calculate it, and what compliance looks like for businesses based onshore or in free zones.
But before we jump to that, a word of caution: if your business is expanding, working across borders, or dealing with both taxable and exempt supplies, VAT can get complicated fast. That’s why seeking expert guidance is necessary.
When in doubt, consider onboarding a financial advisory firm like Oblique Consult can help you figure out what applies to your specific setup, prepare your tax filings, and build a system that supports ongoing compliance.
Now, without further ado, let’s get down to the basics!
What Is VAT and When Did It Start in the UAE?
VAT was introduced in the UAE on January 1, 2018, at a flat rate of 5%. It’s a consumption tax applied at each stage of the supply chain. This means it’s charged on goods and services sold in the UAE, with a few exceptions.
Businesses charge VAT on their sales (known as output VAT) and pay VAT on their purchases (known as input VAT). If you’re registered for VAT, you’ll submit regular filings to the Federal Tax Authority (FTA) that show how much VAT you collected and how much you paid.
The net difference, owed to the government or claimed as a refund, depends on how your business operates and what kind of supplies you deal with.
Who Needs to Register for VAT?
VAT registration isn’t optional if you cross certain revenue thresholds.
- Mandatory registration: If your taxable supplies and imports exceed AED 375,000 in the past 12 months or are expected to in the next 30 days, you must register.
- Voluntary registration: If your business turnover exceeds AED 187,500 (but not the mandatory threshold), you can choose to register.
This registration applies whether your business is based on the mainland or in a free zone.
But the VAT treatment for free zones can vary, as we’ll explain below.
How Is VAT Calculated in the UAE?
The concept behind VAT is simple: it’s a tax on the value added at each stage of the production or supply chain. Here’s how you can calculate it.
Step 1: Determine Output VAT
This is the 5% VAT you charge your customers when you sell a product or service.
Example:
If you sell a service for AED 10,000, the VAT added would be AED 500.
So, the total invoice becomes AED 10,500.
Step 2: Calculate Input VAT
This is the VAT you pay to your suppliers for goods or services used in your business.
Example:
If you bought office furniture for AED 4,000 plus AED 200 VAT, that AED 200 is your input VAT.
Step 3: Net VAT Payable
The amount you owe the FTA is the difference between output VAT and input VAT.
Formula:
VAT to pay = Output VAT – Input VAT
Using our example:
Output VAT = AED 500
Input VAT = AED 200
You owe AED 300 to the FTA.
That’s it. Keep proper records of every taxable invoice you issue and receive, and you’ll always be able to figure out your VAT position.
What About Zero-Rated and Exempt Supplies?
Not everything in the UAE is taxed at 5%. Some goods and services fall into special categories.
Zero-Rated Supplies (0% VAT)
Even though VAT is applied at 0%, businesses can still claim back the VAT they paid on inputs related to these supplies.
Examples include:
- Certain healthcare and educational services
- Exports outside the GCC
- International transportation
Exempt Supplies (No VAT)
Exempt supplies are not subject to VAT at all, and businesses providing these can’t recover the VAT on related purchases.
Examples include:
- Certain financial services
- Residential property (under specific conditions)
- Local passenger transport
Knowing which category your goods and services fall under is important because it impacts how you invoice clients and how much VAT you can reclaim.
How Does VAT Work in UAE Free Zones?
There’s often confusion about the VAT obligations of free zone companies.
The short answer? Yes, most of the time.
The long answer? Read on.
What Are Free Zones?
Free zones are designated areas within the UAE designed to attract foreign investment. Companies in these zones benefit from advantages like:
- 100% foreign ownership
- Customs duty exemptions
- Full repatriation of profits
- Streamlined licensing processes
There are over 40 free zones across the UAE, including popular ones like Dubai Multi Commodities Centre (DMCC), Jebel Ali Free Zone Authority (JAFZA), and Abu Dhabi Global Market (ADGM).
VAT Implications for Free Zone Companies
Under UAE VAT law, there’s a special category known as “Designated Zones”. These are free zones treated as being outside the UAE for VAT purposes, but only under certain conditions.
This doesn’t mean VAT doesn’t apply. It does but the type of transaction determines how it’s applied.
- Goods moving within a Designated Zone: Not subject to VAT.
- Goods moving from a Designated Zone to the mainland: Subject to 5% VAT.
- Services rendered: Almost always subject to VAT, regardless of location.
In short, you mustn’t make the mistake of thinking that a free zone address automatically exempts them from tax. Even if your company is based in a free zone, you might still need to register for VAT and comply with reporting rules.
So, How Do You Stay Compliant?
As we’ve already discussed, VAT compliance applies across the board, no matter if your business is in a free zone or on the mainland.
Below are some things you should stay on top of.
- Register on time with the FTA.
- Issue tax invoices correctly.
- File returns quarterly or monthly, as required by the size of your business.
- Keep accurate records for at least five years.
- Reconcile input and output VAT regularly.
What Happens If You Don’t Comply?
Not everyone has time to manage VAT, and that’s okay. Outsource it to financial advisors or accountants who can handle this process on your behalf. Bear in mind that late filings or non-compliance to VAT regulations often lead to severe financial consequences.
For instance, businesses that fail to register within the required 30 days after crossing the mandatory threshold of AED 375,000 face a flat penalty of AED 10,000. Similarly, if a business no longer meets the registration criteria and doesn’t apply for deregistration within the given 20-business-day window, it can be fined AED 1,000 for the first instance and AED 1,000 monthly thereafter, up to AED 10,000.
The same timeline applies to VAT return submissions, which must be filed and paid within 28 days of the tax period’s end. Missing this deadline results in an initial AED 1,000 penalty, which doubles to AED 2,000 if repeated within two years. Late payments also trigger interest: 2% immediately, followed by a 4% monthly charge until settled.
Other than filing and payment, you must also be careful when submitting information and issuing invoices. Inaccurate returns, failure to issue proper VAT invoices, or not maintaining records for the required five years can result in fines ranging from AED 1,000 to AED 50,000, based on the severity and recurrence of your lapse. Errors caught during an FTA audit carry the highest risk, with penalties potentially reaching 50% of the unpaid tax plus monthly interest.
Final Thoughts
VAT may only be 5%, but it plays a huge role in how companies manage their finances, pricing, and operations.
When done right, it’s business as usual. When done wrong, it can lead to cash flow issues, penalties, or delayed government approvals.
That being said, if you have a clear grasp of the basics and a good advisor on your side, staying compliant is a walk in the park.
As long as you keep your records clean, stay aware of your thresholds, and review your VAT position as your business grows, you’re good to go!
