Since the inception of the UAE VAT Law, there has been a significant interest among businesses regarding Free Designated Zones in the UAE. Specifically, how will the VAT apply to business which exists within these zones and how it will affect those businesses that transact with these free zones on a daily basis.
Free Zones are areas designated within the United Arab Emirates which enjoy a special Tax Status and do not require any local partner in its ownership. In layman terms, this means that a person can incorporate a company within a free zone with 100 percent ownership.
Now there a number of Free Zones within the United Arab Emirates. However, for the purposes of the application of the rules of the FTA, Free Zones can be divided into two categories, Normal Free Zones and Designated Zones.
Designated Zones are Free Zones which comply with certain rules set forth by the FTA. The rules are enumerated later on. The list of these zones is published by the FTA and updated as necessary.
For VAT purposes, a designated zone shall be considered effectively out of State. This means that any transaction with an entity existing inside a designated zone shall be effectively treated as outside the State. It will be as you are transacting with a foreign company and the same rules of Import and Export will apply. However, it should be noted that these transactions are subject to exceptions and restrictions.
It is also pertinent to point out that the supply of goods between two designated zones shall be exempt from the application of VAT, provided that conditions prescribed by the FTA are complied with.
The exemption of VAT on supply from and to Designated Zones is only applicable to goods. Services are exempted from this. This means that where services are provided to companies in Designated Zones, from companies in Designated Zones or are executed by companies in Designated Zones to companies in Designated Zones, VAT will be charged at the normal rate of 5 percent.
There are a number of situations that can occur when transacting with a company within a Free Zone. The few basic ones will be covered below:
The following table summarizes the above-stated scenarios:
|Type of Supplies||From||To||Taxability|
|Goods||Designated Zone||Designated Zone||Non-Taxable|
|Goods||Designated Zone||Mainland*||Taxable at 5% VAT|
|Goods||Mainland||Designated Zone||Taxable at 5% VAT|
|Goods||Designated Zone||Oversea/GCC countries||Non-Taxable|
|Goods||Oversea/GCC countries||Designated Zone||Non-Taxable|
A Designated Zone is such a free zone within the United Arab Emirates which fulfills the prescribed conditions in the Executive Regulations. These conditions are as follows:
When a Designated Free Zone complies with the above-mentioned requirements, for VAT purposes transactions within it are effectively considered outside the State [subject to certain restrictions].
There are a number of Free Zones in the United Arab Emirates, however not all Free Zones are designated zones. Only those Free Zones that follow the procedures set out by the UAE are treated as Designated Zones.
Despite many transactions, conducted within a Designated Zone, being treated as out of state, it remains that Companies need to follow the registration requirements as enumerated by the Federal Tax Authority. Where a companies’ output threshold [Sales] increases the minimum requirement set by the FTA, registration should be undertaken.
Yes, Designated Zones do not follow the normal procedures for VAT for many transactions. Broadly speaking:
If the supply of Services is made within a Free Zone, they are considered as inside the State. This is in accordance with the Cabinet Decision as issued by the Federal Tax Authority.
The application of VAT Will is as per normal rules and regulations on services within the designated zone. VAT will be applicable at the standard rate [5%]
When goods move from one Designated Zone to another Designated Zone, VAT will not be applicable to it. It will be effectively treated as a movement of goods outside the UAE.
Yes, the supply will be taxable, however as previously stated, the treatment will be that of goods being imported into the Emirates, and as a result, VAT will be applied under the Reverse Charge Mechanism.
In this scenario, VAT will be charged at the rate of zero percent.
No, it will not be considered as imports. The normal rule of treating Designated Zone as outside of the State will not be applicable in this scenario as this one of the exceptions of the widely accepted rule. In this particular scenario, the supplier will charge 5% VAT on those goods.
Yes, the Designated Zone companies are able to recover input tax paid on the purchase of items from the mainland. This can be done in accordance with the requirements as enumerated within the Law.
In accordance with the requirements of the Executive Regulation 52, Companies located within the Free Zone are required to pay and account for VAT on the basis of Reverse Charge Mechanism for Services Imported from Outside the State.
Yes, Executive Regulations issued by the UAE specifies certain requirements that need to be fulfilled so that VAT is not required to be levied on the movement of goods between Designated Zones. The requirements are:
There are no special fields for reporting of supplies related to designated Zone.
|Free Trade Zone of Khalifa Port|
|Abu Dhabi Airport Free Zone|
|Khalifa Industrial Zone|
|Jebel Ali Free Zone (North-South)|
|Dubai Cars and Automotive Zone (DUCAMZ)|
|Dubai Textile City|
|Free Zone Area in Al Quoz|
|Free Zone Area in Al Qusais|
|Dubai Aviation City|
|Dubai Airport Free Zone|
|Hamriyah Free Zone|
|Sharjah Airport International Free Zone|
|Ajman||Ajman Free Zone|
|Umm Al Quwain||Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port|
|Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road|
Ras Al Khaimah
|RAK Free Trade Zone|
|RAK Maritime City Free Zone|
|RAK Airport Free Zone|
|Fujairah||Fujairah Free Zone|
|FOIZ (Fujairah Oil Industry Zone)|