VAT‑Free” Special Offers in the UAE: What Businesses Need to Know

Introduction

In the highly competitive retail and consumer markets of the United Arab Emirates (UAE), promotional campaigns are a common tool to attract customers. Among these, offers advertised as “VAT‑free” or “VAT on us” have gained popularity. However, according to the UAE Federal Tax Authority (FTA), such terminology can be misleading and, if not applied correctly, may conflict with UAE VAT legislation.

To address this issue, the FTA issued VAT Public Clarification VATP020, which explains the correct VAT treatment of promotional offers where sellers appear to absorb the VAT cost. This article summarizes the key principles, legal background, and practical implications for businesses operating in the UAE.

Legal Framework for VAT in the UAE

VAT in the UAE is governed primarily by:

• Federal Decree‑Law No. 8 of 2017 on Value Added Tax
• Cabinet Decision No. 52 of 2017 (Executive Regulation)
• Federal Law No. 7 of 2017 on Tax Procedures

Under Article 2 of the VAT Decree‑Law, VAT is imposed on every taxable supply made by a taxable person in the UAE. Article 3 establishes a standard VAT rate of 5%, unless a supply is explicitly zero‑rated or exempt under the law.

Why “VAT‑Free” Advertising Is Misleading

The FTA makes it clear that taxable goods and services cannot legally be supplied without VAT, unless they qualify for zero‑rating or exemption. Therefore, advertising goods or services as “VAT‑free” gives the false impression that VAT is not charged at all, which is inconsistent with VAT legislation.

Even during promotional campaigns, VAT must always be accounted for on taxable supplies. Sellers do not have discretion to decide whether VAT applies; VAT is mandatory by law.

VAT Absorption as a Discount, Not a VAT Exemption

What businesses often describe as “VAT‑free” promotions are, in substance, commercial discounts.

The FTA clarifies that in so‑called “VAT‑on‑us” promotions:

• The seller absorbs the VAT cost
• The customer receives a discount equal to the VAT amount
• VAT is still calculated and paid to the FTA by the seller

Legally, the VAT is included in the price paid by the customer, and the reduction is treated as a price discount, not a removal of VAT.

Impact of Discounts on the Taxable Value

Article 39 of the VAT Decree‑Law provides that when a discount is granted, the value of the supply is reduced proportionally. The Executive Regulation further confirms that the value of the discount is the amount by which the consideration is reduced.

Practical Example

• Normal price of a vehicle: AED 105,000
• Promotional “VAT‑on‑us” price: AED 100,000

In this case:

• The seller grants a AED 5,000 discount
• The AED 100,000 is treated as a VAT‑inclusive price
• VAT must still be extracted and declared from this amount

VAT‑Inclusive Pricing Rules

UAE VAT law requires that, for retail transactions, advertised prices must be VAT‑inclusive. This rule applies even if marketing materials describe the offer as “VAT‑free”.

Exceptions exist only where:

• The supply is for export, or
• The customer is a VAT‑registered person, and VAT‑exclusive pricing is permitted under the Executive Regulation

For standard retail consumers, however, the responsibility lies with the business to ensure that prices charged include VAT and that the correct VAT amount is calculated and reported.

VAT Calculation in “VAT‑Free” Promotions

The FTA provides a clear numerical illustration:

• Advertised promotional price: AED 100,000 “VAT‑free”
• VAT‑inclusive consideration: AED 100,000
• VAT amount to be declared:
  AED 100,000 ÷ 21 = AED 4,761.90

This VAT must be reported in the seller’s VAT return, regardless of the wording used in advertising.

Tax Invoice Requirements

All tax invoices issued for promotional supplies must comply with Article 59 of the Executive Regulation, including:

• Displaying the words “Tax Invoice”
• Showing the VAT rate and VAT amount
• Stating the gross amount payable in AED
• Clearly reflecting any discount applied

Failure to issue compliant tax invoices can expose businesses to administrative penalties under UAE tax procedures law.

Key Takeaways for Businesses

• “VAT‑free” does not mean VAT is not charged—VAT is always due on taxable supplies.
• Absorbing VAT is treated as a commercial discount, not a tax exemption.
• Advertised prices for retail sales must generally be VAT‑inclusive.
• Businesses bear full responsibility for correct VAT calculation, reporting, and invoicing.
• Misleading marketing language can create compliance and penalty risks.

Conclusion

The FTA’s clarification leaves little room for ambiguity: VAT cannot be waived by marketing language. While businesses are free to design promotional campaigns and absorb VAT costs commercially, they must ensure that VAT is correctly calculated, included in prices, and reported to the authorities.

Understanding this distinction between tax treatment and marketing presentation is essential for maintaining compliance and avoiding unnecessary tax exposure in the UAE.

Source Federal tax authority

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