Avoiding VAT Penalties: Key Risks for UAE Healthcare Business

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While the UAE VAT Law offers relief to the healthcare industry through zero-rating, not all supplies qualify.  Misinterpretation can lead to non-compliance, penalties, or lost refund opportunities. Below are key high-risk areas every healthcare business must carefully evaluate:

Incorrect Classification of Supplies (Zero-rated vs Standard-rated)

• Zero-rating is not blanket: Only qualifying human medicines and medical equipment approved by the Ministry of Health and Prevention (MOHAP) are zero-rated.
• Non-approved items, such as certain dietary supplements, cosmetics, over-the-counter goods, and non-core equipment may be standard-rated at 5%.

Free Zone Operations (Designated Zones): A Misunderstood Relief

• Not all Free Zones are Designated Zones; only those specifically notified under the VAT Executive Regulations qualify for VAT relief on specific transactions.
• Confusion arises around VAT on intra-group transfers, import/export from Designated Zones, and third-party contracts executed within the zone.

Mixed and Bundled Supplies

• Hospitals and clinics often provide bundled services (e.g., room, medicine, nursing, meals, physiotherapy) under one fee.
• Each component may carry a different VAT treatment – some may be standard-rated, and others zero-rated.

VAT on Free Supplies

• Free-of-cost medical aid, drugs, or equipment given to charities, campaigns, or during emergencies may still trigger deemed supply rules under VAT law.
• VAT may be payable on cost value if input VAT was recovered initially.

Sponsorships, Marketing & Promotional Supplies

• Pharma distributors frequently offer promotional items or sponsor events and medical conferences.
• Determining whether these are supply of service, consideration in-kind, or pure gifts is a grey zone.

Intercompany Transactions & Cost Allocations

• Shared services (e.g., IT, HR, Finance) across hospitals, clinics, and pharmacies in different legal entities require arm’s length pricing and proper invoicing with VAT.
• Group VAT registration does not eliminate documentation requirements for intercompany recharges.

Delay in VAT Updates for Newly Approved Products

• There’s often a time lag between MOHAP approvals and VAT classification updates in internal systems, leading to incorrect VAT application at point of sale.

Documentation & Disclosures

• Missing or incorrect MOH approvals, customs codes, or TRN mismatches.
• Errors in tax invoices, treatment of bundled goods, or consignment stock.

What are the Consequences for Non-Compliance?

• Misclassifying products can lead to underpayment of VAT penalties, and retrospective FTA audits.
• Improper input VAT recovery can trigger FTA disallowance, affecting cash flow and leading to backdated liabilities.
• Applying VAT incorrectly in Free Zones can result in incorrect VAT filings and supply chain disruption
• Overlooking deemed supply rules can result in unexpected VAT dues and penalties during audit.
• Absence of proper supporting documentation may lead to FTA audit challenges, especially during group audits.
• Charging VAT on zero-rated items or vice versa could result in customer complaints, audit exposure, and financial loss.

How We Can Support You:

• VAT Health Check/ Process Audit – Identify risk-prone areas and ensure classification accuracy
• VAT Compliance Services
• Custom-Tailored VAT Advisory
• FTA Audit Support & Documentation Review
• Free Zone VAT Compliance Support – Align with the latest Cabinet Decisions
• Review and Advice on high-risk Agreements
• VAT Training for Finance & Logistics Teams – Industry-specific, practical guidance

Way Forward for Pharma Businesses:

• Review product classification regularly with MOHAP & FTA updates
• Automate and reconcile VAT returns to reduce human error
• Evaluate VAT implications on marketing and bundled offerings
• Engage VAT experts with deep industry knowledge