The Federal Tax Authority (FTA) introduced Federal Decree-Law No. 8 of 2017 to implement Value Added Tax (VAT) across the United Arab Emirates (UAE). This tax framework became effective on 1st January 2018 and remains active with periodic updates to ensure alignment with international standards and national economic goals.
As of 2025, VAT continues to apply to most goods and services supplied in the UAE, affecting individuals, businesses, and charitable organizations. In this blog, we will break down the essentials, including VAT for charities, registration thresholds, taxable supplies, VAT refunds, penalties, and more.
What is VAT?
VAT is an indirect tax added to most goods and services when consumers buy or sell. Even though businesses collect this tax and pay it to the government, the final consumer bears the cost. So, whether a consumer buys a product at a store or hires a service, there’s a good chance VAT is included in the price.
Why Was VAT Introduced in the UAE?
The UAE government introduced VAT to diversify its revenue streams beyond oil and gas, ensuring sustainable funding for public services like healthcare, infrastructure, education, and social welfare. With this approach, the UAE aims to maintain its high standard of living while reducing reliance on oil income.
Do Charities Pay VAT in the UAE?
Yes, but with specific conditions. The UAE VAT law distinguishes between business and non-business activities for VAT purposes. Charities engaged in commercial or economic activities are subject to VAT. However, donations received without any direct benefit in return may not be taxed.
Understanding VAT on donated goods and services is critical. If a charity sells donated goods, VAT may apply. Charitable organizations should consult VAT consultants in Dubai to ensure proper classification of their activities and compliance with the latest VAT laws.
VAT Rate in UAE
The standard VAT rate for 2025 remains at 5%. However, certain goods and services fall under zero-rated or exempt categories:
Standard-rated (5%): Most goods and services.
Zero-rated (0%): Includes exports, select healthcare and education services, and international transportation.
Exempt: Life insurance, certain financial services, residential real estate, and local public transport.
VAT Registration in the UAE
Businesses must register for VAT if their taxable turnover exceeds AED 375,000 annually. Voluntary registration is available for businesses exceeding AED 187,500. Registration can be done via the FTA’s official portal. For charitable organizations, registration depends on the nature and scope of their operations.
VAT on Donated Goods and Services
Donations are generally outside the scope of VAT. However, VAT on donated goods and services applies when donations are sold or used for business purposes. For example, a charity selling donated items in a thrift store may be required to charge VAT.
Non-Business Activities for VAT
Activities undertaken by entities without the intent to make a profit, like non-business activities for VAT, are typically outside VAT scope. For instance, free workshops, awareness programs, or purely voluntary community services.
A Simple Example of How VAT Works
Let’s say:
A manufacturer sells a product for AED 100. They charge AED 5 as VAT (5%).
A wholesaler buys it and sells it for AED 200 (charging AED 10 VAT).
A retailer buys it and sells it to the end customer for AED 300 (adding AED 15 VAT).
At each step, businesses pay VAT on their purchases and collect VAT on their sales. But they only pay the net amount to the government, which is the difference between VAT collected and VAT paid.
Input Tax and VAT Refunds in the UAE
Input tax is the VAT consumers pay on things they purchase for business or charity operations. They can usually claim it back, as long as you have proper documentation like tax invoices.
There are also cases where VAT refunds in the UAE are available, especially for diplomatic missions, international organizations, and even charities engaged in zero-rated activities.
Record-keeping is a Must!
Whether you're a business or a charity, if you're VAT-registered, you must keep records for at least 5 years. This includes:
Sales and purchase records
Tax invoices
Payroll and inventory reports
Any other financial documents
Keeping clean records helps with VAT returns, audits, and possible refunds.
Filing VAT Returns in the UAE
VAT-registered entities need to file their VAT return every quarter. The deadline is usually the 28th of the month following the end of the quarter.
During filing, consumer calculate their output tax payable (VAT collected from customers) minus their input tax (VAT paid on purchases). If the output tax is higher, they pay the balance to the FTA.
Penalties to Watch Out For
The FTA doesn’t take VAT violations lightly. Here are some penalties:
AED 15,000: Not displaying prices inclusive of VAT
AED 5,000 per document: Not issuing tax invoices or credit notes
AED 2,500: Not informing FTA about tax margin changes
Up to 300% of tax: In cases of tax evasion
Avoiding these fines is one more reason to seek support from VAT consultants in Dubai.
The Bottom Line
Understanding VAT is essential when running a business or a non-profit organization in the UAE. There are many expert tax consultants available, and seeking professional guidance is advisable, as they can assist with registration, filing, and record-keeping. The good news is that many of these consultancies also offer eligibility checks to determine if your business qualifies for a VAT refund in the UAE.
