What is the difference between zero-rated and exempt supplies?

3. VAT 3.1 What is a supply subject to VAT? Most business transactions involve supplies of good or services. A taxable supply is one where there is:  a supply of goods or services;  for consideration;  supplied in the course of conducting business in the UAE;  not an exempt supply. Where a taxable supply is made by a taxable person (i.e. by a person registered, or obliged to be registered, for VAT), that supply is subject to VAT. Supplies may be subject to VAT at either the standard rate or zero-rate of VAT. 3.1.1 Standard rate In general terms, where VAT is charged at the standard rate, businesses that are registered for VAT are able to recover the VAT they are charged by their suppliers on goods and services, subject to certain conditions. VAT which is incurred on purchases is known as ‘input tax’. 3.1.2 Zero rate VAT is charged on zero-rated supplies at the rate of 0%. Zero-rated supplies are treated as taxable supplies in all respects, including the right of the person making the supply to recover the VAT on their own business expenditure. 3.2 What is an exempt supply? Similar to zero-rated supplies, no VAT is charged in respect of exempt supplies. However, since those supplies are not ‘taxable supplies’, the supplier cannot recover any of the VAT on expenses (input tax) directly incurred in making exempt supplies. In addition, businesses which make supplies with a mixture of differing VAT liabilities will need to use a method of apportionment in respect of VAT incurred on general costs (i.e. input tax which is non-attributable to either taxable or exempt supplies). Incurred VAT therefore may represent a large irrecoverable cost to businesses involved in making supplies which are wholly or partly exempt from VAT, such as those operating in the financial services and insurance sectors. Page 8 VAT Guide | Insurance | VATGIN1

3. VAT 3.1 What is a taxable supply? Most business transactions involve supplies of good or services. A taxable supply is one where there is:     a supply of goods or services; for consideration; supplied in the course of conducting business in the UAE; by a VAT registered business (or a business that is obliged to be VAT registered). Taxable supplies may either be subject to the standard rate or zero rate of VAT. The term ‘taxable supply’ excludes exempt supplies and any supplies that are outside the scope of UAE VAT. 3.1.1 Standard rate In general terms, where VAT is charged at the standard rate, businesses that are registered for VAT are able to recover the VAT they are charged by their suppliers on goods and services, subject to certain conditions. VAT which is incurred on purchases is known as ‘input tax’. 3.1.2 Zero rate VAT is charged but at 0% on zero-rated supplies. Zero-rated supplies are treated as taxable supplies in all respects, including the right of the person making the supply to recover the VAT on their own business expenditure. 3.2 What is an exempt supply? No VAT is charged on exempt supplies. As these supplies are not ‘taxable supplies’, the supplier cannot recover any of the VAT on expenses (input tax) directly incurred in making exempt supplies. In addition, businesses which make supplies with a mixture of differing VAT liabilities will need to use a method of apportionment in respect of VAT incurred on general costs (i.e. input tax which is non-attributable to either taxable or exempt supplies). 7 VAT Guide | Financial Services | VATGFS1

6. Zero-rated and exempt supplies 6.1. Chapter summary The purpose of this chapter is to give an overview of the supplies which will be subject to VAT at the zero rate and supplies which will be exempt from VAT. More detailed Guides will be provided separately on some of the areas below. 6.2. Zero-rated supplies Zero-rated supplies are taxable supplies of goods or services which are subject to VAT at 0%. The following broad categories of supplies are zero-rated:            A direct or indirect export of goods or services to outside the GCC Implementing States. International transport of passengers and goods which starts or ends in the UAE or passes through the UAE’s territory, including services related to such transport. Goods and services consumed or used during the international transportation of goods or passengers. Air, sea and land means of transport intended for the transportation of passengers or goods, and goods and services supplied for the purpose of the operation, repair, maintenance or conversion of these means of transport. Aircraft or vessels designated for rescue and assistance by air or sea. Certain investment precious metals. The first supply of a newly constructed or converted residential building within 3 years of the completion of the construction or conversion. The first supply of a building specifically designed to be used by charities. Crude oil and natural gas. Educational services and related goods and services for nurseries, preschool, and elementary education; and higher educational institutions owned or funded by Federal or local Government. Preventive and basic healthcare services and related goods and services. As mentioned above, although VAT charged on a zero-rated supply is nil, the supply is still treated as a taxable supply in all other respects – including the right of the person making the supply to recover the VAT on expenses incurred in making the zero-rated supply. 6.3. Exempt supplies The following supplies are exempt from VAT:   23 Financial services which are not conducted for an explicit fee, discount, commission, rebate or similar type of consideration, including life insurance and reinsurance of life insurance. Residential buildings, other than the residential buildings which are specifically zero-rated. VAT Guide | Taxable Person | VATG001

Article 41 – Zero-rating Healthcare Services 25 1. The phrase “Healthcare Services” means any Service supplied that is generally accepted in the medical profession as being necessary for the treatment of the Recipient of the supply, including preventive treatment. 2. A supply of healthcare services shall be zero rated on the condition that the supply shall: a. Be made by a healthcare body or institution, doctor, nurse, technician, dentist, or pharmacy, licensed by the Ministry of Health and Prevention or by any other competent authority concerned with healthcare. b. Relate to the wellbeing of a human being. 3. "Healthcare services" do not include any of the following: a. Any part of a supply that relates to staying in or attending an establishment the principal purpose of which is to provide holiday accommodation or entertainment such that any Healthcare Service is incidental to the provision of the accommodation or entertainment. b. Elective treatment for cosmetic reasons other than prescribed by a doctor or medical professional for treating or prevention of a medical condition. 4. A supply of Goods or an Import of Concerned Goods is zero-rated if it is a supply or an Import of:26 a. Any medical product as specified in a decision issued by the Cabinet. b. Any other Goods not covered by paragraph (a) of this Clause which are supplied in the course of supplying a Person with zero-rated Healthcare Services that are necessary for the supply of such Healthcare Services. Title Seven – Exempt Supplies