Are you a business primarily focused on exports, international transport, or providing essential services like education or healthcare? If your revenue is above the mandatory VAT registration threshold, you still might have an incredible opportunity to simplify your tax compliance!
This article breaks down the rules for the Exception from VAT Registration and, critically, what it means for your business once approved.
Is Your Business Eligible for a VAT Registration Exception?
The VAT registration threshold is met when your taxable supplies and imports exceed AED 375,000 over the last 12 months, or you anticipate they will in the next 30 days. However, the law provides a pathway for businesses to avoid the administrative burden of VAT filing if their operations meet very specific criteria.
IMPORTANT: The Eligibility Criteria
You may apply for exception from VAT registration if you only make zero-rated supplies and do not import any goods or services that are subject to reverse charge. You are not eligible for exception from VAT registration if you make zero-rated supplies along with standard rated supplies.
In simple terms, if 100% of your taxable revenue comes from zero-rated activities, and you have no reverse-charge import obligations, you can apply for the exception.
What are Zero-Rated Supplies?
Zero-rated supplies are still considered ‘taxable supplies,’ but the VAT rate applied is 0%. They are typically activities the government wants to encourage, such as export-driven and essential services.
The following supplies are eligible for zero-rating:
- Exports of goods and services outside the implementing GCC States.
- Certain international transportation services (goods and passengers).
- Supply of certain aircraft or vessels designated for rescue, assistance, or commercial use.
- Supply of certain investment precious metals (99% pure or more, tradable in global markets).
- First supply of certain residential buildings (within three years of completion).
- Crude oil and natural gas.
- Certain educational services and related goods/services.
- Certain healthcare services and related goods/services.
VAT Registration Exception Required Documents Checklist
Once ready, the application for exception is made by selecting the appropriate option within the EmaraTax VAT Registration application and attaching these supporting documents.
- Trade License: Valid copy.
- Emirates ID & Passport Copies: For the Owner, Partners, and Authorized Signatories.
- Memorandum of Association (MOA)/Articles of Association (AOA): Or Certificate of Incorporation.
- Proof of Business Address: Such as a Tenancy Contract or Ejari.
- Bank Letter/Details: Confirming the company’s bank account information (IBAN).
- Official Declaration Letter: A signed and stamped letter stating:
- Your supplies are 100% zero-rated.
- You do not import any goods or services subject to Reverse Charge.
- Business Flowchart: A simple diagram illustrating your business activities and showing the zero-rated nature of your supplies.
- Financial Records: Documents proving your taxable supplies exceed the mandatory threshold (AED 375,000).
- Specific Zero-Rating Evidence: Commercial documentation to prove the zero-rated nature of your sales (e.g., Export Documents like Customs declarations, Bills of Lading, or Contracts for zero-rated services).
Approved! The Critical Implications of an Exception
If the Federal Tax Authority (FTA) reviews your application and grants the Exception from VAT Registration, the implications are significant and directly impact your administrative and financial operations:
1. Exemption from Filing VAT Returns
Once approved for the exception, your business is no longer required to submit regular VAT returns (Form VAT 201) to the FTA. This is the primary administrative relief, saving you time, compliance costs, and the risk of penalties for late or incorrect filings.
2. No Recovery of Input Tax (VAT Paid on Purchases)
This is the most crucial implication to understand.
- A standard VAT-registered business dealing in zero-rated supplies can charge 0% VAT (Output Tax) and still recover the VAT they paid on their own business expenses (Input Tax). This usually results in a tax refund position.
- A business granted an exception forfeits the right to recover any Input Tax paid on its purchases, supplies, or expenses. The VAT you pay on overheads (e.g., office rent, utilities, business travel, professional fees) becomes a cost to your business, increasing your operational expenses.
Key Consideration: You must weigh the administrative savings of not filing returns against the financial cost of losing Input Tax recovery. For businesses with very high capital expenditure or significant VAT-able expenses, the exception might be financially disadvantageous.
3. Tax Identification Number (TIN) Designation
Once the exception is confirmed by the FTA, you will be issued a specific Tax Identification Number (TIN) to indicate your status.
The TIN for confirmation of exception from VAT will be suffixed with the letters ‘XC’.
This ‘XC’ suffix confirms your legal standing and that you are not required to charge VAT or file returns.
Next Steps for Your Business
Do you wish to apply for an Exception from VAT Registration based on the above?
If your business only makes the zero-rated supplies listed above and has no reverse charge obligations, applying for the exception offers a major compliance benefit.
You are still required to complete the remaining information on the VAT registration application form to formally submit your request for the exception.
At Finexus Advisory, our expert tax consultants provide comprehensive VAT registration, filing, and advisory services across the UAE. Whether you’re a start-up or an established company, we ensure that your VAT processes are accurate, compliant, and stress-free.
✅ VAT registration
✅ VAT De-registration
✅ VAT return filing
✅ VAT Health Check
✅ VAT Refund
✅ VAT Exception
Need expert advice to analyze your cash flow and determine if the cost of lost Input Tax recovery outweighs the benefit of simpler compliance? Finexus is providing expert services, contact us
