A Complete Guide to VAT Compliance in Dubai and the UAE

Did you know the Middle East does not tax individuals? Historically, taxes only applied to oil companies and foreign banks.

That’s great news for anyone looking to start a business in Dubai. However, since January 1, 2018, the UAE introduced Value-Added Tax (VAT) on most goods and services to diversify its income sources. If VAT feels unfamiliar or overwhelming, this guide will provide everything you need to know about VAT compliance in Dubai.

Why Start a Business in Dubai?

Dubai offers a dynamic economy and government-backed initiatives to accelerate business growth. However, the tax advantages stand out the most.

• No personal or corporate income tax
• 5% VAT rate on goods and services
• Setup in free zones allows:
  • 0% corporate/income tax
  • No customs duties
  • Full repatriation of profits

What Is VAT?

Value-Added Tax (VAT) is a consumption tax added at every stage where value is created in the supply chain. Paid by the end consumer, businesses are responsible for collecting and remitting it to the government. Failure to do so can result in severe penalties.

VAT is widely adopted globally, with over 150 countries, including the EU, Canada, and New Zealand, implementing it.

A Brief History of VAT in Dubai

• Introduced on January 1, 2018
• Regulated by the Federal Tax Authority (FTA)
• Aimed at creating new income streams to support public services such as healthcare, education, and infrastructure

7 Key Things to Know About VAT in Dubai

1. VAT Rate is 5%
A flat 5% VAT applies to most goods and services, including imports. Common examples include retail businesses, restaurants, and hotels.

2. Certain Goods/Services Are Zero-Rated
While still considered “taxable supplies,” some services carry a 0% VAT rate, such as:

• Exports outside GCC member states
• International transportation
• Crude oil, natural gas, and investment-grade precious metals
• Healthcare, education, and newly built residential properties (first 3 years)

3. Some Supplies Are VAT-Exempt
Exempt supplies are not subject to VAT at all. Examples include:

• Financial services (e.g., loans, insurance)
• Residential properties (sale/lease)
• Local public transportation (land, air, or sea)

4. VAT Registration Threshold

• Mandatory registration: Businesses with annual taxable supplies exceeding AED 375,000.
• Voluntary registration: Businesses earning over AED 187,500 annually can register voluntarily.

5. Input Tax Recovery
Businesses can recover VAT paid on their purchases (Input Tax) to avoid double taxation. VAT liability equals the VAT collected from customers minus Input Tax paid on purchases.

6. VAT Registration Is Mandatory
To register for VAT:

• Create an FTA e-service account
• Complete the registration process and upload required documents
• Receive a Tax Registration Number (TRN)

Track your supplies and register as soon as you approach the registration threshold to avoid penalties.

7. Filing VAT Returns and Payment

• Submit VAT returns via the FTA portal
• File returns:
  • Quarterly for businesses earning below AED 150 million
  • Monthly for businesses earning above AED 150 million
• Pay VAT online via credit card, eDebit, or bank transfer

Penalties for Non-Compliance:

• Late return filing: AED 1,000 (first offense), AED 2,000 for subsequent delays
• Late payment: 2% penalty in the first 7 days, 4% thereafter, up to 300% of unpaid VAT

Even businesses with zero-rated supplies must file VAT returns to avoid fines.

Ready to Start Your Business in Dubai?

Dubai’s VAT system is straightforward, with a low 5% tax rate and significant business advantages like tax-free income. Ensuring compliance with VAT obligations will help you avoid penalties and operate smoothly.

Need help calculating startup costs or VAT compliance? Let us guide you. Try our business cost calculator to plan your business expenses effectively.