UAE VAT Categories: Zero-Rated, Exempt and Reverse Charge

Every sale in the UAE falls into a VAT category, and the category decides whether you charge VAT, at what rate, whether you can recover the VAT on your costs, and what goes on your invoice and VAT return. There are six: standard-rated at 5%, zero-rated at 0%, exempt, outside the scope of VAT, reverse charge and the profit margin scheme. The one that trips most businesses up is zero-rated versus exempt. Neither adds VAT to the customer's bill, but a zero-rated business can recover the VAT on its costs and an exempt one generally can't.

How we wrote this guide. The rules come from the UAE VAT law (Federal Decree-Law No. 8 of 2017 and its amendments) and its Executive Regulation as amended to September 2026, both published by the Federal Tax Authority (FTA), and the Ministry of Finance's e-invoicing Guidelines. The examples are ours. For a specific supply, check the detailed conditions or ask your tax adviser. Facts last verified: 3 November 2026.

The Six VAT Categories at a Glance

Standard-rated (5%): most goods and services. You charge VAT and recover the VAT on related costs.
Zero-rated (0%): a taxable supply at a 0% rate, such as qualifying exports. No VAT is charged, but you still recover the VAT on related costs.
Exempt: no VAT is charged, such as residential rent. The VAT on related costs is generally not recoverable.
Outside the scope: not a supply for UAE VAT purposes at all, for example when the place of supply is outside the UAE.
Reverse charge: the customer, not the supplier, accounts for the VAT, such as on imported services.
Profit margin scheme: VAT is charged only on the margin, for qualifying second-hand goods, antiques and collectors' items.

Zero-Rated vs Exempt: The Difference That Matters

Both put no VAT on the customer's bill, so they look the same on an invoice. They work very differently behind it:

Zero-rated supplies are taxable supplies. They count towards VAT registration, you issue a tax invoice, and you can recover the input VAT on the costs that relate to them.
Exempt supplies aren't taxable supplies. You don't issue a tax invoice for them, and under Article 54 of the VAT law the input VAT on costs used for exempt supplies isn't recoverable. If you make both taxable and exempt supplies, you apportion the input VAT on shared costs (Executive Regulation, Article 55).

Example: two businesses each spend AED 100,000 on costs, plus AED 5,000 of VAT.

An exporter whose sales are zero-rated recovers the AED 5,000, so its costs are AED 100,000.
A residential landlord whose rent is exempt can't recover it, so its costs are AED 105,000.

"Nil-rated" isn't a UAE VAT category. The UAE term is zero-rated.

What Is Zero-Rated in the UAE

Article 45 of the VAT law zero-rates these supplies, each subject to conditions in the Executive Regulation:

Exports of goods and services outside the GCC states that implement VAT.
International transport of passengers and goods, and related services.
Certain means of transport for carrying passengers and goods, such as aircraft and ships, and the goods and services to operate and maintain them.
Investment precious metals: gold, silver and platinum of 99% purity or more, in a form traded on global bullion markets.
New residential buildings: the first sale or lease within 3 years of completion, and the first supply of a building converted from non-residential to residential.
Buildings designed for charities, on their first supply.
Crude oil and natural gas.
Education: nursery, pre-school and school education, and higher education at institutions owned or funded by the federal or local government, with related goods and services.
Preventive and basic healthcare, with related goods and services.

Zero-rating needs evidence. For exports in particular, keep the documents that prove the goods or services left the UAE or were supplied to a customer outside it.

What Is Exempt in the UAE

Article 46 of the VAT law exempts four types of supply:

Certain financial services. Under Article 42 of the Executive Regulation, financial services are exempt when they aren't charged for through an explicit fee, commission, discount or rebate, such as interest on a loan. Issuing or transferring shares and debt securities, life insurance and reinsurance, and some fund management and virtual asset services are also exempt.
Residential buildings, sold or leased, other than the zero-rated first supply.
Bare land.
Local passenger transport.

One consequence for every business: bank charges, card fees and other financial services charged as an explicit fee are standard-rated, so the VAT on them is input VAT you can usually recover. Our bank reconciliation guide shows how to record it.

Outside the Scope of VAT

Some transactions aren't supplies for UAE VAT at all, so no VAT applies and they don't count as zero-rated or exempt. Examples:

Supplies whose place of supply is outside the UAE.
The transfer of a whole business, or an independent part of one, to a taxable person who continues it (VAT law, Article 7).
Selling a voucher, unless you receive more than its stated value (Article 7).

On an e-invoice, invoice type code 480 is only for invoices made up wholly of out-of-scope supplies, never for zero-rated or exempt ones.

Reverse Charge

Under the reverse charge, the customer accounts for the VAT instead of the supplier. There are two main cases:

Imports: when a taxable person imports services, or goods under the reverse charge, for its business, it's treated as making the supply to itself and accounts for the VAT (Article 48(1)).
Domestic reverse charge: for supplies between VAT-registered businesses of crude or refined oil, natural gas and hydrocarbons (Article 48(3)), and, under Cabinet Decisions, certain electronic devices (No. 91 of 2023), precious metals and precious stones (No. 127 of 2024) and metal scrap (No. 153 of 2025). Each decision sets its own conditions.

Example: a Dubai company buys AED 10,000 of consulting services from a firm abroad. It records AED 500 of output VAT and, because it uses the service for taxable sales, AED 500 of input VAT. The net VAT is zero, but both lines must appear on the return.

For domestic reverse charge supplies, the supplier's tax invoice must state that the customer accounts for the VAT and cite the relevant provision. A simplified tax invoice isn't allowed, and for oil, gas and hydrocarbons, prices must be shown excluding VAT (Executive Regulation, Article 27). Imports of goods and services under the reverse charge aren't subject to e-invoicing.

Profit Margin Scheme

A VAT-registered business can charge VAT on its margin, not the full price, for second-hand goods, antiques over 50 years old and collectors' items. The goods must have been bought from someone not registered for VAT, or from a business that also used the margin scheme (Executive Regulation, Article 29). The margin is treated as including VAT, so the VAT is margin × 5 ÷ 105.

Example: a dealer buys a used car for AED 40,000 from a private seller and sells it for AED 46,300. The margin is AED 6,300, and the VAT is 6,300 × 5 ÷ 105 = AED 300.

How Categories Show Up on Invoices, Returns and E-Invoices

Tax invoices are issued for taxable supplies, which means standard-rated and zero-rated sales. Our guide to UAE tax invoice requirements lists what each must show.
The VAT return reports standard-rated sales by emirate, and zero-rated and exempt sales separately, so keep them apart in your accounts. See our chart of accounts for UAE businesses.
E-invoices carry a tax category on every line, using the same six categories. See what PINT AE is.

Common Mistakes

Treating exempt sales as zero-rated and recovering input VAT that isn't recoverable.
Zero-rating an export without evidence that the goods or services left the UAE.
Missing the reverse charge on services bought from abroad.
Charging VAT on residential rent, which is exempt except for the first supply of a new building.
Using invoice type code 480 for exempt or zero-rated sales on an e-invoice.
Forgetting VAT on bank fees when recording bank charges, so input VAT goes unclaimed.

Our guide to calculating UAE VAT covers the arithmetic for each case.

Where Octate Fits

Octate applies the VAT treatment for each transaction based on its type, the customer's location and the product category, covering standard-rated, zero-rated, exempt and reverse-charge scenarios with a full audit trail. It gives you the figures for your VAT return and creates PINT AE e-invoices from the same ledger. See accounting and VAT and UAE e-invoicing.

Quick Answers

What is the difference between zero-rated and exempt in the UAE? Both charge no VAT, but zero-rated supplies are taxable at 0%, so you can recover the VAT on related costs. Exempt supplies aren't taxable, so that VAT generally can't be recovered.

What is zero-rated in the UAE? Exports outside the GCC VAT states, international transport, investment precious metals, the first supply of new residential buildings, crude oil and natural gas, and qualifying education and healthcare, among others listed in Article 45 of the VAT law.

What is exempt from VAT in the UAE? Certain financial services, residential buildings other than their first supply, bare land and local passenger transport.

Is residential rent subject to VAT in the UAE? It's exempt, except for the first supply of a residential building within 3 years of its completion, which is zero-rated.

Is VAT charged on bank charges in the UAE? Yes. Financial services charged as an explicit fee or commission are standard-rated at 5%.

What is the reverse charge mechanism in the UAE? The customer accounts for the VAT instead of the supplier: on imports of services and certain goods, and on domestic supplies between registered businesses of oil and gas, certain electronic devices, precious metals and stones, and metal scrap.

Is "nil-rated" the same as zero-rated? "Nil-rated" isn't a UAE VAT term. In the UAE, supplies taxed at 0% are zero-rated.

How is VAT calculated under the margin scheme? On the margin between purchase and selling price, which is treated as including VAT: margin × 5 ÷ 105.

Sources

Federal Tax Authority: Federal Decree-Law No. 8 of 2017 on VAT and its amendments, Articles 7, 43, 45, 46, 48 and 54, and the Executive Regulation, as amended to Cabinet Decision No. 149 of 2026, Articles 27, 29, 42, 55 and 59. Both are unofficial English translations published by the FTA.
Ministry of Finance: UAE Electronic Invoicing Guidelines, version 2.0 (26 October 2026), section 10.5 on tax categories and the reverse charge Cabinet Decisions
Octate: UAE e-invoicing and accounting and VAT

Checked on 3 November 2026.