1. Background: Why the Issue Matters

With the steady growth of corporate and hospitality sectors in the UAE, many businesses engage third-party service providers to manage the daily transportation of employees or hotel guests.

These arrangements typically involve long-term contracts — often one to three years — where the supplier provides buses, drivers, fuel, and other operational components for an agreed monthly charge.

From a VAT standpoint, such arrangements raise a key question: are these transportation services taxable or exempt? The answer lies in correctly interpreting the concept of “local passenger transport” under UAE VAT law.

2. The Legal Foundation: Article 45 of the Executive Regulations

The UAE VAT framework, under the Executive Regulations, specifically addresses the exemption for local passenger transport services.

According to Article 45, the following principles apply:

• Passenger transport is exempt when provided within the UAE in a qualifying means of transport (e.g., a bus, taxi, metro, or tram) designed or adapted for moving people.

• The exemption applies whether the passengers are members of the public or a defined group (such as company employees).

• However, the exemption does not extend to transportation whose principal purpose is pleasure, entertainment, or leisure.

This means that determining the VAT treatment depends less on who the passengers are and more on why the transport service exists.

3. Applying the Rules in Practice

A. Transportation for Corporate Employees

Where a business provides or arranges daily transport for its staff between residences and workplaces, this generally qualifies as local passenger transport.

If a supplier provides such services under a contract with a company, using buses licensed and designed to carry passengers, the service typically falls within the exemption.

In other words, no VAT should be charged on the transport portion of the service, provided it meets the qualifying conditions.

B. Transportation for Hotel Guests

Transport arranged by hotels to move guests between properties, airports, or event venues can also qualify as local passenger transport.

However, the purpose test becomes important here.

If the transport is purely for logistics — i.e., taking guests from point A to point B — it is treated as passenger transport and exempt.

But if it forms part of an entertainment or tour package (for example, sightseeing, desert safaris, or leisure trips), then it falls outside the exemption and becomes subject to VAT at 5%.

C. Additional and Ancillary Services

While the transport itself may be exempt, any extra service connected to it may not be.

Examples include:

• Placing corporate or hotel branding on the buses (advertising service).

• Renting the bus without a driver (vehicle leasing).

• Providing refreshments or entertainment onboard.

Such elements go beyond the simple act of passenger transport and are treated as taxable supplies, attracting VAT at the standard rate.

4. What Qualifies as a “Passenger Transport Service”

A supply must meet all the following conditions to be considered passenger transport for VAT exemption purposes:

Condition   Description

Nature of service   The core activity must be transporting people, not leasing vehicles or providing entertainment.

Means of transport   The vehicle must be licensed and designed for carrying passengers (bus, minibus, taxi, etc.).

Geographic scope   The journey must begin and end within the UAE — cross-border trips are treated differently.

Purpose   The principal objective should be transportation, not leisure or tourism.

Failure to satisfy any one of these conditions can move the transaction from exempt to taxable, requiring VAT registration and invoicing compliance.

5. Key Considerations for Businesses

1. Review the Contract Structure

Ensure the agreement clearly defines that the supplier is providing transport services (not merely leasing vehicles).

The inclusion of the driver and control over routes strengthens the case for exemption.

2. Separate Exempt and Taxable Components

If the contract includes both passenger transport and additional services (e.g., branding or advertising), invoice them separately to avoid disputes on VAT treatment.

3. Maintain Proper Documentation

Keep route permits, vehicle registration details, and copies of service agreements as evidence that the vehicles qualify for passenger transport.

4. Monitor the Purpose of Trips

If transportation is occasionally provided for entertainment or sightseeing, VAT should be applied on those specific journeys.

5. Conduct Periodic VAT Health Checks

As the VAT treatment depends on facts and usage, periodic reviews help identify whether transport arrangements remain compliant.

6. Conclusion: Clarity Saves Compliance Costs

Understanding the VAT implications of employee and guest transportation services is crucial for both service providers and their corporate clients.

The UAE VAT system takes a substance-over-form approach: what matters is the real nature of the service.

If the transportation is a genuine passenger movement activity using qualifying vehicles, it benefits from exemption.

If, however, the service extends to leasing, branding, or entertainment, VAT applies at the standard rate.

By classifying supplies correctly, maintaining clear contracts, and separating taxable and exempt elements, businesses can ensure compliance while avoiding unnecessary VAT exposure.

In short, a well-structured transport arrangement keeps both passengers — and tax positions — moving smoothly.