To improve economic competitiveness and simplify doing business, the United Arab Emirates (UAE) has introduced VAT zero-rating for certain transportation sectors. This change demonstrates the government’s dedication to promoting international trade, increasing tourism, and making compliance easier in the logistics and travel industries.

The recent updates, part of Cabinet Decision No. 100 of 2024, effective from November 15 2024, were further clarified by the Federal Tax Authority (FTA) in Public Clarification VATP040. These changes modify how VAT is applied to passenger and goods transport, related services, and vehicles used for commercial purposes.

Understanding VAT Zero-Rating vs. Exemption

Before exploring the details, it’s crucial to differentiate between VAT zero-rating and exemption:

• Zero-rating (0%) indicates that VAT is not applied to the service or product, but input tax remains eligible for reimbursement.
• Exemption, however, implies that VAT is not applied, and input tax cannot be reclaimed.

What’s Covered Under the New VAT Zero-Rating?

1. International Passenger and Goods Transportation

Effective from 15 November 2024, the UAE will apply a 0% VAT rate on:

• Transportation of passengers or goods originating from or ending outside the UAE.
• Transit transport passing through the UAE.
• Multi-leg journeys involving the UAE as part of a longer international route, as long as the same supplier manages all segments.

This policy greatly benefits airlines, shipping companies, freight forwarders, and international logistics providers.

2. Domestic Leg of International Journeys

If a local segment, such as from Dubai to Sharjah, is part of an international trip like Dubai to London, that domestic leg can also be eligible for zero-rating, provided:

• It is provided by the same service provider as the international journey. 
• It is an essential part of the international transport contract.
• It is invoiced as part of a single composite supply.

Means of Transport Also Zero-Rated

The law now states that commercial vehicles—such as aircraft, ships, buses, and trains can benefit from zero-rated VAT if they are:

• Designed or adapted for commercial purposes. 
• Built to carry ten or more passengers or used for international freight or passenger transport.

Conversely, vehicles used solely for private, recreational, or group-specific purposes (such as school buses and hotel shuttles, fishing vessels, dredgers, and rescue boats) do not qualify and will be taxed at the standard 5% VAT rate.

Support Services Covered Under Zero-Rating

The UAE has expanded zero-rating to include various transport-related services, such as loading and unloading, handling, storage, and packaging directly connected to international transport, as well as repair, maintenance, and conversion of qualifying transport means only if performed directly on board.

This measure offers relief to businesses providing related transport services, particularly at airports, ports, and logistics centres.

Important Conditions for Compliance

The FTA has laid out several conditions that businesses must meet to benefit from zero-rating:

• The supplier must be VAT-registered and maintain complete documentation.
• For mixed domestic-international transport, the entire supply must be made by the same legal entity.
• Invoices and contracts should indicate the international nature of the transport services.

Failure to maintain proper documentation or meet supply structure conditions may lead to reclassification of zero-rated supplies as standard-rated (5%).

Failure to comply may result in VAT audits, penalties, and the loss of zero-rated status.

Why This Matters for Businesses

These VAT changes provide significant benefits:

• Reduced costs through reclaimable input tax.
• Easier cross-border operations.
• Enhanced competitiveness for transport companies in the UAE.
• Incentives for fleet upgrades via VAT-free commercial vehicle acquisitions.

How German Fintax Consultancy Can Help?

Navigating VAT laws, especially with frequent changes, can be challenging and time-consuming. German Fintax Consultancy’s team of VAT specialists and tax advisors provides customised solutions to help transport companies, freight operators, and travel agencies stay compliant and optimise their VAT structures. Whether evaluating zero-rating eligibility, structuring service contracts, or preparing VAT returns, we assist your business in maintaining compliance and boosting efficiency.