As of January 1st, 2019, Dubai imposes a 5% VAT on tax-registered businesses on the supply of goods and services. However, in some limited cases, a 0% rate of VAT will apply if a number of conditions are met.
Companies exempted from VAT
The law provides for VAT exemptions for companies with a turnover not exceeding a certain threshold and for companies with an activity in specific sectors that are not subject to this tax.
- Companies with turnover not exceeding AED 375 000: when the turnover does not exceed AED 375 000 annually, the company is not subject to VAT. Companies with a turnover between AED 187,500 and AED 375,000 can register voluntarily for VAT. No registration threshold applies to non-resident businesses for the supply of goods on which UAE VAT is applied.
- Activities exempt from VAT: the law provides that companies with an activity in the field of health, real estate, transport, gas and oil are not subject to this tax.
Companies that can apply for 0% VAT
The 0% VAT rate is applied to the supply of goods and services exported outside the Gulf Cooperation Council (GCC) Member States subject to VAT, to international transport, crude oil/natural gas supply, to the first supply of residential real estate and to certain specific areas, such as health, care and education.
In addition, in accordance with Decision (No. 46 of 2020) of June 4th, 2020, a person will be considered "outside the State", and will therefore benefit from the VAT exemption for services export, if that person has only a short-term presence in the State, less than one month, and that this presence is not actually related to the provision of services.
VAT exemption applies to certain financial services, as well as to the subsequent delivery of residential real estate. In addition, transactions involving bare land and inland passenger transport are also exempt from VAT.
The impact of VAT for the free zones:
The VAT law does not deal specifically with free zones, but it does deal with certain zones called “designated zones”.
The legislation stipulates that VAT is not due on the supply of goods from one designated area to another, or when the import of goods into designated areas from outside the UAE. In Dubai, these are the following free zones:
- Free zone of Jebel ALi
- Dubai Cars and Automotive
- Dubai Textile City
- Dubai Aviation City
- Free zones of Al Quoz
- Al Qusais
- Dubai Airport
Thus, the supply of goods by a company established in a designated area to a mainland, will be treated as an import by the importer and will be the subject of a reverse charge. Supply of goods from a mainland to a designated free zone will be treated as local supply of goods.
For example:
The supply of goods from a mainland company to a company established in a designated area – 5% VAT as it is a domestic sale;
- The supply of goods by a company established in a designated area to a mainland company – import taxable at 5% VAT;
- The supply of goods between two companies established in designated areas – VAT not applicable;
- Export from a designated area to companies established in other Gulf countries – 0% VAT as it’s treated as export.
This specific treatment does not concern the service provision.
What are the reporting obligations?
These new laws will introduce additional compliance constraints on taxpayers. Thus, the taxpayer must issue invoices respecting a specific form and must complete the VAT returns (on a monthly or quarterly basis). Surplus VAT may be claimed and recovered and VAT credits may be carried forward.
When taxpayers do not comply with these rules, they can incur penalties and fines.
Our team of experts can assist you in determining whether you are within the scope of VAT and help you comply with all reporting obligations.
