What is VAT
Value Added Tax (VAT) is an indirect tax. It is added to the price of goods and services at each stage of sale, and businesses collect it and pass it to the government, rather than you paying it directly to the tax office. If you live in or visit Saudi Arabia or the UAE, you pay it every time you buy a coffee, a phone or a hotel night, usually without noticing because it is built into the price.
Saudi Arabia’s Zakat, Tax and Customs Authority (ZATCA) describes VAT as a tax on goods and services bought and sold by businesses, with a few exceptions. The UAE’s system is set by its Ministry of Finance and run by the Federal Tax Authority (FTA). Both countries brought in VAT at the start of 2018, but the rates are now very different.
How VAT works
VAT is charged at every step of a supply chain, but each business pays only on the value it adds. A registered business charges VAT on its sales (called output tax) and can usually reclaim the VAT it paid on business purchases (called input tax). It pays the difference to the tax authority when it files its return.
Here is a simple illustration using the UAE’s 5% rate and round numbers. A shop buys a jacket from a wholesaler for AED 100 plus AED 5 VAT. It sells the jacket for AED 200 plus AED 10 VAT. The shop has collected AED 10 and already paid AED 5, so it sends the remaining AED 5 to the FTA. The final customer has paid AED 10 of VAT in total, and the government has received it in two parts from the two businesses.
This is why the tax falls on the consumer, not the businesses in the middle: they recover what they pay and pass on what they collect.
VAT rates and thresholds in Saudi Arabia and the UAE
| Saudi Arabia | UAE | |
|---|---|---|
| Tax authority | ZATCA | Federal Tax Authority (FTA) |
| Standard rate | 15% (raised from 5% on 1 July 2020) | 5% (since 1 January 2018) |
| Mandatory registration | Taxable supplies above SAR 375,000 a year | Taxable supplies and imports above AED 375,000 |
| Voluntary registration | Above SAR 187,500 | Above AED 187,500 |
The UAE’s Ministry of Finance says VAT was introduced across the country on 1 January 2018 at a standard rate of 5%. Saudi Arabia started at the same 5% on the same date, then tripled the rate to 15% from 1 July 2020 as part of measures announced during the COVID-19 pandemic.
In the UAE, the FTA says a business must register when its taxable supplies and imports over the past 12 months exceed AED 375,000, or when it expects them to cross that figure in the next 30 days. A business can choose to register once its supplies, imports or taxable expenses pass AED 187,500, which lets start-ups with little turnover reclaim VAT on their costs. The FTA notes the mandatory threshold does not apply to foreign businesses.
Zero-rated and exempt supplies
Not everything is taxed at the standard rate. There are two special categories, and the difference matters to businesses:
- Zero-rated: VAT is charged at 0%, and the seller can still reclaim the VAT it paid on its own costs.
- Exempt: no VAT is charged, but the seller cannot reclaim the VAT on its costs.
The UAE Ministry of Finance lists zero-rated supplies including exports of goods and services to outside the GCC, international transport, certain investment precious metals of 99% purity, newly built residential property supplied for the first time within three years, and designated education and healthcare services. Residential property is otherwise generally exempt, while sales and leases of commercial property are taxed at 5%.
Saudi Arabia follows a similar pattern. Exports and international transport are zero-rated, while some financial services and residential rents are exempt. The exact lists in both countries are set in each country’s VAT law and regulations, so a business should check the official guides for its own case.
What VAT is not
Part of answering what is VAT is being clear about what it is not. It is a tax on spending, not on what you earn. Salaried employees in Saudi Arabia and the UAE do not pay income tax on their wages, so for most workers VAT is the tax they meet most often.
It is also charged on the price before tax, so the same purchase costs noticeably more in Saudi Arabia. As a simple illustration, take a laptop priced at 4,000 before tax. In Saudi Arabia, 15% VAT adds SAR 600, for a total of SAR 4,600. In the UAE, 5% VAT adds AED 200, for a total of AED 4,200. The currencies differ, but the share of the price going to tax is three times higher in Saudi Arabia.
Finally, VAT paid in one country stays there. A resident cannot reclaim Saudi VAT in the UAE or the other way round, and the tourist refund scheme in the UAE is only for visitors leaving the country.
Registering, filing and e-invoicing
A registered business adds VAT to what it sells and files a periodic return declaring the tax due, then pays through the tax authority’s channels.
How often a business files depends on its size. In Saudi Arabia, according to ZATCA, businesses whose annual supplies exceed SAR 40 million file monthly, and those at or below SAR 40 million file quarterly. Missing the deadline has a cost: ZATCA says the fine for late filing is at least 5% and at most 25% of the tax that had to be declared.
Saudi Arabia has also moved invoicing online. Under ZATCA’s e-invoicing rules, VAT-registered businesses have had to issue electronic invoices since December 2021. A second phase, which connects business billing systems directly to ZATCA’s Fatoora platform, has been rolled out in waves since January 2023, starting with the largest taxpayers and moving down to smaller ones. ZATCA notifies each group of businesses before its deadline.
Why VAT is in the news
Two recent announcements show both sides of VAT: compliance for businesses and refunds for visitors.
On 21 October 2026, ZATCA urged businesses to file returns. Those above the SAR 40 million threshold were asked to file for September, and the rest for the third quarter of 2026 by 31 October 2026. ZATCA asks taxpayers to file and pay through its app. See our coverage of the Saudi VAT return reminder.
On 20 October 2026, the UAE’s FTA introduced an AI-powered platform for tourist VAT refunds. Visitors register in Planet’s mobile app, scanning their face and saving images of a passport and bank card. The system is running at airports in Abu Dhabi, Dubai and Sharjah. The FTA says a tourist now waits one business day in total to receive a refund, against about nine days earlier. Read more in our report on the UAE tourist VAT refund platform.
The FTA also gave scheme figures. Since 2018, about AED 4.2 billion has been refunded across 25 million transactions. About 16,700 retail stores are connected, and 98 self-service kiosks handle 22.4% of transactions.
Tourist refunds in the UAE
Visitors to the UAE can claim back VAT on goods bought during their stay through the refund scheme the FTA runs with an authorised operator, Planet. The refund depends on buying from retailers connected to the scheme, which issue electronic refund tags at the till. Under the new process, the app guides you through the steps: some purchases qualify for an automatic refund with no inspection, while others need a check at a smart gate or kiosk before you leave.
Residents cannot use the tourist scheme. For them, VAT is simply part of the price.
What it means for you
If you work in Saudi Arabia or the UAE, the VAT rate is the main difference you feel in day-to-day prices: 15% in Saudi Arabia against 5% in the UAE. Big purchases such as cars, electronics and furniture carry the full rate in both countries, so the gap adds up.
If you run or work for a business in Saudi Arabia, check which filing category applies, since the SAR 40 million threshold decides between monthly and quarterly returns, and file on time to avoid the 5% to 25% fine. ZATCA’s call centre number is 19993, and it also answers queries by email and chat. In the UAE, keep an eye on the AED 375,000 registration threshold as turnover grows; the FTA counts both the past 12 months and the next 30 days.
If you shop in the UAE as a visitor, buy from retailers in the refund scheme and keep your passport and bank card details ready in the app before you reach the airport.
For readers in India wondering what is VAT compared with GST, the idea is familiar: GST works on the same principle of taxing value added at each stage with credit for tax paid on inputs, though the rates and rules differ. Our GST calculator shows how the arithmetic works on an Indian purchase.
