VAT in the UAE: Registration, Rates, and Compliance

The UAE implemented VAT in 2018 with a standard rate of 5 percent, applied at each stage of the supply chain. Businesses must adhere to compliance regulations, and failure to do so can result in significant penalties.

By Giulia Interesse

The United Arab Emirates (UAE) implemented Value Added Tax (VAT) on January 1, 2018, following the issuance of Federal Decree-Law No. 8 of 2017 (hereinafter, VAT law) by the Federal Tax Authority (FTA). VAT is an indirect tax applied to the supply of goods and services at various points along the supply chain, with the end consumer ultimately bearing the cost. Businesses registered for VAT collect this tax on behalf of the government.

The introduction of VAT in the UAE was part of the government’s strategy to diversify its revenue sources and reduce dependence on oil income. The revenue generated from VAT helps sustain the country’s high-quality public services, such as education, healthcare, and transportation, ensuring a continued high standard of living for its residents.

This article provides an overview of VAT registration, rates, and compliance requirements for businesses operating in the UAE in 2024.

How does VAT work in the UAE?

In the UAE, the VAT system applies a 5 percent tax rate on the supply of goods and services at each stage of the value chain. For example, a manufacturer producing a mobile phone will add value before selling the product to a wholesaler. The wholesaler, in turn, increases the price and sells the product to a retailer, who ultimately sells it to the final consumer.

Throughout this process, VAT is applied at each stage. For instance, the manufacturer may sell the phone to the wholesaler for AED 100, with a 5 percent VAT added, bringing the total to AED 105. The wholesaler then increases the value, selling the phone to the retailer for AED 200, which includes a VAT charge of AED 10 (5 percent). Finally, the retailer adds their margin, selling the phone to the consumer for AED 300, including AED 15 in VAT.

In this manner, VAT is applied at every transaction, and businesses registered for VAT can reclaim the VAT paid on their purchases, ensuring that the tax burden is ultimately borne by the final consumer. The businesses only pay the net VAT, which is the difference between the VAT collected on sales and the VAT paid on purchases. This credit mechanism ensures fairness and transparency in the tax system.

Supplies under the UAE VAT law

Under the UAE VAT Law, supplies are categorized based on the nature of the goods or services provided, with specific VAT rates or exemptions applied accordingly.

• Standard-rated supplies are subject to the standard VAT rate of 5 percent, applicable to most goods and services within the UAE.
• Zero-rated supplies are taxed at a 0 percent VAT rate, but businesses are still able to claim input tax credits related to these supplies. Examples include specific educational and healthcare services, exports to countries outside the GCC, international transport, and certain precious metals like gold and silver.
• Exempt supplies are excluded from VAT altogether, meaning businesses neither charge VAT nor can they reclaim input tax on these supplies. Common examples include the sale or rental of residential properties, undeveloped land, life insurance, some financial services, and public transport services.
• Deemed supplies refer to transactions that don’t qualify as traditional supplies but are still subject to VAT under UAE law. These include assets transferred without compensation, the movement of business assets between the UAE and GCC countries, or the private use of goods for which input tax has been claimed.
• Out-of-scope supplies fall outside the jurisdiction of the UAE VAT law and are not subject to VAT regulation or reporting.

Each of these categories plays a critical role in determining how VAT is applied or exempted, ensuring that businesses align their tax obligations according to the specific type of supply.

VAT registration in the UAE

Both local businesses and international companies operating in the UAE are required to register for VAT once their taxable supplies or imports surpass the mandatory threshold of AED 375,000 (US$ 102,096.37).

Even if a business does not meet this threshold, it can still opt for voluntary VAT registration to benefit from input tax credits.

Mandatory VAT registration

Businesses must register for VAT if their taxable supplies exceed AED 375,000. (US$ 102,096.37) in the previous 12 months or if they expect to surpass this threshold in the next 30 days. Taxable supplies include all sales within the UAE that are subject to VAT. Failure to register on time may result in penalties.

Voluntary VAT registration

Companies that do not meet the mandatory registration threshold but whose taxable supplies and imports are above AED 187,500 (US$51,048.19) can voluntarily register for VAT. This option is particularly advantageous for startups and small businesses, as it allows them to reclaim VAT on purchases and other business-related expenses.

Who is exempted from VAT in the UAE?

Certain goods and services are exempt from VAT under the VAT law. These sectors are not required to register for VAT or submit VAT returns. Key exempt categories include:

• Bare land: The sale or lease of undeveloped land (bare plots) is not subject to VAT.
• Financial services: Financial services that do not charge an explicit fee, such as those without commissions or rebates, are exempt.
• Local passenger transport: Services like buses, taxis, and metro systems that provide transportation within the UAE are VAT-exempt.
• Residential properties: The lease and sale of residential buildings, with certain exceptions that are zero-rated, do not incur VAT.

These exemptions help ease the tax burden on essential sectors, ensuring that VAT does not apply to everyday services like housing and local transportation.

How to register for VAT in the UAE for a new company

Registering a company for VAT in the UAE involves several structured steps to ensure compliance with the FTA. The below table presents an overview of the process.

Documents required for VAT registration

The following documents are required for VAT registration in the UAE:

• Trade license: A valid trade license to confirm the legal status of the business.
• Memorandum of Association (MOA): If applicable, this document outlines the company’s structure and the roles of its members.
• Bank account information: Business bank account details for VAT-related transactions.
• Contact information: Business email address and phone number for communication with the FTA.
• Office address: The physical location of the business to verify its presence in the UAE.
• Annual turnover report: A report of the business’s yearly revenue, used to determine eligibility for VAT registration.
• Customs information: Customs details if the business is involved in import/export activities.
• Emirates ID copies of partners: Copies of Emirates IDs for all business partners or owners.
• Power of attorney: If VAT registration is being handled by someone else, the power of attorney documentation is required.

In addition, depending on the type of business (e.g., charity, association), further documentation may be needed. Having all the required documents ready ensures a smooth and efficient VAT registration process.

Post-registration compliance

After registering for VAT in the UAE, businesses must adhere to several compliance practices to avoid penalties and ensure smooth operations. First, VAT must be applied correctly to all taxable goods and services, following the current standard rate of 5 percent. It’s essential that businesses clearly state the VAT amount on invoices issued to customers, ensuring transparency and accuracy in billing.

Maintaining comprehensive records is another critical aspect. Accurate documentation of all sales, purchases, and VAT transactions is not only required for calculating VAT liabilities but is also crucial for VAT return submissions. These records should be kept for a minimum of five years as per FTA regulations.

Submitting VAT returns on time is equally important, as these returns summarize the VAT collected and deducted within a specific tax period. Businesses are also required to issue VAT-compliant invoices that include essential details such as the issue date, unique invoice number, and TRN. Finally, full compliance with FTA guidelines, including proper invoice formatting and timely submission of returns, ensures that businesses meet all their obligations under the UAE’s VAT framework.

Penalties for non-compliance with VAT regulations in the UAE

The FTA is authorized to impose penalties and fines on businesses that violate VAT laws or fail to adhere to regulations.

For instance, businesses that fail to display a price list in their premises may be fined AED 15,000 (US$ 4,083.85), while those that neglect to issue a tax invoice, credit note, or other required documents during a supply can face a fine of AED 5,000 (US$ 1,361.28) per missing document. Additionally, failure to inform the FTA of any tax charges based on margins incurs a penalty of AED 2,500 (US$ 680.64).

More severe violations, such as not maintaining goods within a Designated Zone or transferring them to another without authorization, may result in fines ranging from AED 500 to 300 percent of the tax involved. In cases of deliberate tax evasion, penalties can reach 300 percent of the tax evaded, signaling the seriousness of adhering to the UAE’s VAT regulations.

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