Step by Step Guide to VAT Tax in UAE

VAT tax in UAE was introduced on 1st January 2018 with a fixed rate of 5%. To avoid all the unnecessary penalties, it is important for businesses as well as individuals to clearly understand how VAT in the UAE works, what the basic rules are that must be followed, and how you can effectively stay compliant. After all, no one wants to lose their hard-earned money on fines. In this UAE VAT guide, we will explore the complete details of Value Added Tax in the UAE, covering registration, compliance, returns, Free Zone rules, and many other important information.

Understanding VAT Registration in the UAE 

Mandatory Registration: If a business’s taxable supplies as well as imports surpass AED 375,000 over the last 12 months, or are expected to do so in the coming 30 days, the company must register for VAT.

Voluntary Registration: A business can choose voluntary VAT registration if its taxable supplies or expenses have exceeded AED 187,500 in the past 12 months or are likely to exceed this amount within the next 30 days. This allows new businesses with significant startup costs to register and reclaim the VAT they pay on business expenses.

What Happens After the VAT Registration? 

Once your business is registered for VAT, you are required to:

• Apply a 5% VAT to all taxable sales of goods and services.
• Reclaim VAT that you have paid on business expenditures.
• Keep proper records of your sales, purchases, VAT collected, and VAT paid.

The business must regularly submit VAT returns to the FTA. These returns show:

• The amount of VAT that was obtained from clients
• The amount of VAT paid on company expenses

If a business collects more VAT from its customers (Output VAT) than it pays on expenses (Input VAT), it has to give the extra to the government. But if it pays more VAT than it collects, it can claim the excess amount paid on purchases in the form of a refund or credit to its tax account.

Deadlines for VAT Registration

Any business whose taxable turnover reaches the mandatory VAT threshold must complete VAT registration within 30 days of reaching that limit.

Under UAE VAT legislation, companies that do not register on time face severe penalties, which can consist of a fixed AED 10,000 fine plus additional administrative charges.

What Is a VAT Return? 

A VAT return is a formal summary document that a VAT-registered business submits to the tax authorities on a regular basis (usually quarterly or monthly). Its primary purpose is to report the total amount of VAT the business has collected from its customers and the amount of VAT it has paid to its suppliers during a specific accounting period.

Filing Frequency 

• VAT returns are generally submitted every three months by businesses in the UAE.
• Larger businesses, with high yearly sales, may have to file monthly instead.

The FTA decides your filing schedule when you first register for VAT, and this information is clearly stated in your VAT registration certificate.

When to Submit the VAT Return

Most businesses must submit their VAT returns every quarter, within 28 days after the tax period ends. The large businesses might be required to submit their VAT returns every month. You can submit your VAT return via the Federal Tax Authority’s EmaraTax Portal.

How to Register for VAT? 

You must take a few simple steps if you wish to register your business for VAT. The first step is to register an account on the FTA website. After making the account with accurate details, open the account and complete the VAT registration form by providing your business information and financial details.

You will simply need to provide:

• The name of your Business and contact details
• Copy of the Trade License
• Passport and Emirates ID of the business owner
• Financial statements showing income
• Bank account details
• Description of business activities

After submitting the application, make sure to record the reference number for tracking. The Federal Tax Authority may take several weeks to review your submission, and you should be ready to provide any additional details or documents they might request during the process.

After the application is accepted, a Tax Registration Number (TRN) will be provided to your business. All of your official documents and tax invoices must include this number.

Continue Reading: Step by Step Guide for UAE VAT Registration

Common Errors to Avoid When Registering for VAT 

Register on Time: Don’t wait until your income goes over the VAT threshold limit. If you expect the taxable revenue of the business will exceed AED 375,000 in the next 30 days, file for the tax registration. If you register late, you may have to face a late VAT registration penalty of AED 10,000.

Give Accurate Financial Info: If you enter the wrong sales or income figures, the FTA might delay your registration.

Submit VAT Returns on Time: If you submit your VAT return late, you will incur late filling penalties, which are difficult to have waived.

Keep All Your Records: For at least five years, preserve your financial documents, VAT invoices, and receipts in case the tax authorities ask for them or select your company for FTA audit.

Types of VAT Rates in the UAE

Zero-Rated VAT (0%) – Zero rated VAT means that businesses charge 0% VAT on certain supplies that are considered taxable supplies but you do not charge 5% VAT on them. For example, export of services and goods, international transport, and some healthcare as well as education services.

Standard Rated VAT (5%) – Standard rated VAT of 5% is the general VAT rate which is applied to most of the goods and services in the UAE. For example, if something costs AED 100, you will pay AED 105 after VAT. Businesses collect this tax from customers and pay to the Government. Likewise, you can claim from the Government the VAT you paid on your business purchases.

Exempt VAT (No VAT) – This means VAT is not added to the price of the supply, and businesses are not allowed to recover any VAT they paid on related expenses. This applies to things like residential rent, public transport within the UAE, and undeveloped land.

How VAT Works Between Free Zones, Mainland, and Designated Zones in the UAE 

Here is how VAT works when goods or services are exchanged between different areas and jurisdictions in the UAE:

UAE Mainland: 

If a tax registrant sells goods or provides services in the Mainland, it must add 5% VAT on its sales invoices. In other words, all the mainland entities are subject to 5% VAT.

Designated Zones:

Designated Zones are specific Free Zones listed by the Cabinet that are treated as being outside the UAE VAT territory for the supply of goods, but only if all of the following conditions are met:

• The goods are supplied within a Designated Zone.
• The goods are not used or consumed outside the Designated Zone.
• Both the supplier and the customer are VAT-registered businesses.
• The customer is established in a Designated Zone.
• The movement of the goods is documented with evidence (e.g., customs documentation).

If any of the above conditions is not met, the standard 5% VAT rate will become applicable on the supply of goods or services.

Services: 

VAT is generally charged at 5% on services, even if the services are provided within or between Designated Zones. The location of the buyer or seller does not change the VAT rule for services.

Trade Between Mainland Companies and Designated Zones 

Goods: If a Mainland business sells and delivers goods directly into a Designated Zone, the supply may be treated as zero-rated (0%), provided all customs documentation is in place and the goods are not consumed within the UAE. However, if the goods are intended for use in the UAE Mainland, the standard 5% VAT applies.

Services: When a Mainland company provides services to a business in a Designated Zone, it must charge 5% VAT. The location of the customer or where the service is used does not change this, services are always taxed.

Trade Within the Same Designated Zone

Goods: When two VAT-registered companies inside the same Designated Zone trade goods, the supply is considered as out of scope, but the goods should remain within the designated zone and specific conditions by the Federal Tax Authorities must be complied with. However, if the goods are later sent to the UAE Mainland and used there, the transaction will be considered as an import of good/services and hence 5% VAT will become payable.

Services: If two businesses in the same Designated Zone provide services to each other, they still have to charge 5% VAT. There are no special VAT exemptions for services, even if both companies are in the same zone.

Trade Rules Between Designated and Non-Designated Free Zones

Goods: When goods move from one of the UAE’s Designated Zones into a non-Designated Free Zone, the VAT is applied based on where the goods ultimately end up. If they stay in the Designated Zone or are sent outside the UAE, VAT is usually not charged. But if the goods are brought into the Mainland or used inside the UAE, then 5% VAT applies.

Services: All services exchanged between Designated and non-Designated Free Zones are taxable at 5%, regardless of where they are delivered or consumed.

Trade Within Non-Designated Free Zones

Goods: Businesses located in Free Zones that aren’t recognized as Designated Zones must follow Mainland VAT regulations. This means businesses operating there must apply the standard 5% VAT on the sale of goods.

Services: The same rule applies to services, 5% VAT is charged on all services between companies in non-Designated Free Zones.

VAT Deregistration in UAE 

VAT deregistration clearly means removing the business from the records of FTA VAT system when you no longer need to remain a tax-registered person. It is important to know when to apply for VAT deregistration, the process, and timeline to do so.

Mandatory VAT Deregistration

You are required to apply for VAT deregistration within 20 business days if:

• Your business has ceased making taxable supplies – If you are no longer make sales that are subject to VAT, you must cancel your VAT registration.
• Your income drops below the mandatory threshold – You must apply for deregistration if your taxable supplies in the past 12 months have gone below AED 375,000 and you do not expect them to exceed AED 375,000 in the next 30 days.

Failure to apply on time may result in a fine of up to 10,000 AED.

Voluntary VAT Deregistration

If your taxable supplies in the past 12 months or last 365 days have gone below the voluntary VAT registration threshold of AED 187,500, you may request FTA to cancel your registration. The cancellation of registration is subject to FTA’s review as well as confirmation that all the required conditions for cancellation have been met. Before they approve your cancellation request, you will need to provide documents and evidence to show that your request is valid and follows the law.