Understanding VAT in Dubai

Did you know that the Middle East does not impose personal income tax? Instead, taxes are mainly levied on oil companies and foreign banks.

For entrepreneurs, this makes Dubai an attractive destination for business. However, as of January 1, 2018, Dubai introduced value-added tax (VAT) on most goods and services.

As a business owner, you’ll need to charge VAT on nearly all transactions, from restaurant meals to retail purchases. If you’re new to VAT and want to learn more, keep reading for a complete guide to VAT compliance in Dubai.

Why Start a Business in Dubai?

Dubai offers numerous advantages for entrepreneurs, including government-backed funding initiatives and a thriving economy. However, the most significant benefit is the tax structure.

• The UAE does not impose personal or corporate income tax.
• VAT is set at a low rate of 5% on taxable goods and services.
• Businesses in free zones enjoy 0% corporate tax, no customs duties, and 100% profit repatriation.

What Is Value-Added Tax (VAT)?

VAT is a consumption-based tax applied to goods and services at each stage of production and distribution. Unlike income taxes, VAT is charged on purchases, with businesses responsible for collecting and remitting the tax.

Over 150 countries, including the European Union, Canada, and New Zealand, have implemented VAT as a standard taxation method.

History of VAT in Dubai

Dubai introduced VAT on January 1, 2018, making it the first time a VAT system was implemented in the Middle East. The UAE government established the Federal Tax Authority (FTA) to manage and collect VAT revenue.

VAT was introduced to diversify government income sources, reducing reliance on oil revenues while funding essential services like healthcare, infrastructure, and waste management.

Key Facts About VAT in Dubai

Before starting a business in Dubai, understanding VAT obligations is essential. Missing VAT payments can lead to severe penalties, with interest reaching up to 300% of unpaid VAT liability.

1. VAT Is Levied at a Flat 5% Rate

Dubai imposes 5% VAT on most taxable goods and services, including imports. A taxable supply refers to any transaction involving goods or services for consideration within Dubai.

Businesses in sectors like retail, hospitality, and entertainment must collect and remit VAT.

2. Certain Services Qualify for 0% VAT

Some services and goods are subject to 0% VAT, including:

• Exports outside the Gulf Cooperation Council (GCC) member states.
• International transportation services.
• Crude oil, natural gas, and investment-grade precious metals (gold and silver with 99% purity).
• Healthcare and education services.
• New residential properties (supplied within three years of construction).

Zero-rated VAT businesses must still register for VAT and issue invoices, but they charge 0% VAT on their transactions.

3. Certain Services Are VAT-Exempt

VAT-exempt services are entirely excluded from VAT obligations. These include:

• Financial services (banking, loans, insurance).
• Residential property leases or sales.
• Vacant land sales.
• Local public transportation (buses, metro, taxis, domestic flights).

Unlike zero-rated supplies, businesses offering VAT-exempt services do not need to register for VAT.

4. VAT Registration Is Mandatory for Businesses Earning AED 375,000+

Businesses must register for VAT if their taxable supplies or imports exceed AED 375,000 annually.

For businesses with taxable supplies between AED 187,500 and AED 375,000, VAT registration is optional but recommended.

5. VAT Can Be Reclaimed on Business Expenses

Businesses can recover VAT paid on purchases through Input Tax Credits. This means companies only pay VAT on the value they add to products and services.

For example, if a company buys raw materials and pays 5% VAT, then sells a finished product and collects 5% VAT, they can deduct the VAT paid on purchases from the VAT collected from customers.

6. VAT Registration Process in Dubai

To register for VAT, businesses must:

• Create an e-service account on the Federal Tax Authority (FTA) portal.
• Submit a VAT registration application with business details, financial records, and banking information.
• Receive a unique Tax Registration Number (TRN) upon approval.

All registered businesses must track taxable supplies and update their VAT status as required.

7. Filing and Paying VAT in Dubai

Businesses must file VAT returns online through the FTA portal every quarter, within 28 days after the tax period ends.

• Turnover below AED 150 million → File VAT returns quarterly.
• Turnover above AED 150 million → File VAT returns monthly.

Late submissions result in penalties:

• AED 1,000 for the first missed deadline.
• AED 2,000 for subsequent late filings.
• 2% penalty on unpaid VAT for the first 7 days, then 4% per month (capped at 300% of unpaid VAT).

VAT payments can be made online via:

• Credit card.
• eDebit payments.
• Local or international bank transfers.

Ready to Start Your Business in Dubai?

Now that you understand VAT compliance in Dubai, ensure your business meets all legal requirements.

Need help calculating business setup costs? Use our business cost calculator today to plan your startup expenses efficiently.