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:

  • Supply of Goods from One Designated Zone to Another Designated Zone:
    • Such supply shall be non-taxable and out of the scope of Tax. If both Transacting companies are within Designated Zones, it will be as if the transaction is taking place outside of the UAE and thus will be out of the scope of VAT
  • Supply of Goods from a Designated to Mainland UAE:
    • Where goods are supplied from within a Free Zone to a company within the Mainland UAE, VAT will be chargeable at the Standard Rate of 5 percent. However, VAT will be charged under the Reverse Charge Mechanism which will be covered separately.
  • Supply of Goods from Mainland UAE to Designated Zone:
    • In case of such a supply, VAT will be charged normally by the Seller of the Goods and collected from the Company operating in the Designated Zone.
  • Supply of Goods from Designated Zone to Overseas/GCC Countries:
    • Goods supplied out of Designated to Overseas Countries will be treated as out of the scope of VAT and will not be charged VAT.
  • Supply of Goods from Overseas/GCC Countries to Designated Zone:
    • In this scenario, Goods will be out of the scope of VAT and not charged 5 percent Tax.

The following table summarizes the above-stated scenarios:

 

Type of SuppliesFromToTaxability
GoodsDesignated ZoneDesignated ZoneNon-Taxable
GoodsDesignated ZoneMainland*Taxable at 5% VAT
GoodsMainlandDesignated ZoneTaxable at 5% VAT
GoodsDesignated ZoneOversea/GCC countriesNon-Taxable
GoodsOversea/GCC countriesDesignated ZoneNon-Taxable

 

 

FAQ’s Regarding Designated Zones.

 

What is a Designated Zone in the UAE?

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:

  • The Designated Zone has fenced off area with Customs Controls within the Emirates.
  • The methods and processes of storage and management of goods shall be specific to each designated zone.
  • The operator of the designated zone complies with the procedures set by the Authority.

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].

 

Are all Free Zones Designated Zones in the United Arab Emirates?

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.

 

Should Companies that exist inside of a Designated Zone register with the Federal Tax Authority.

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.

 

Are there Special Provisions which need to be followed by the Companies within Free Zones?

Yes, Designated Zones do not follow the normal procedures for VAT for many transactions. Broadly speaking:

  • Since Free Zones are considered as out of State, Goods brought out of Free Zones, will be considered as an Import of Goods.
  • Similarly, sending goods out of Free Zones will be considered as Export of Goods.
  • The rules and regulations regarding Import and Export of Goods will be followed in such a scenario.

 

How will VAT apply to services within Designated Zones?

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.

How will VAT apply to services within Designated Zone?

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%]

 

VAT Treatment for Goods transferred from Designated Zone to Designated Zone?

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.

 

If goods are supplied from Designated Zone [e.g. JAFZA] to Mainland [e.g. Dubai], will the supply be Taxable?

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.

 

How will VAT apply in case of a supply of goods outside of UAE from Designated Zone?

In this scenario, VAT will be charged at the rate of zero percent.

 

What will be the VAT treatment of goods supplied from the mainland of UAE to the designated zone? Is it considered as imports?

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.

 

In case of purchase of goods from Mainland, can Designated Zone Company recover input VAT?

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.

 

Is VAT Applicable on Import of Services within a Designated Zone?

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.

 

Are there any requirements that need to be followed for the movement of goods between Designated Zones so that VAT is not levied?

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:

  • Goods are not released or used/altered in any way during transit
  • A transfer is undertaken in accordance with GCC Customs Laws for Customs Suspension.

 

In the VAT Return Form, are there aby special fields for reporting of supplies related to Designated Zones?

There are no special fields for reporting of supplies related to designated Zone.

 

List of Designated Zones within the UAE

EmirateDesignated Zone
 

Abu Dhabi

Free Trade Zone of Khalifa Port
Abu Dhabi Airport Free Zone
Khalifa Industrial Zone
 

 

 

Dubai

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
 

Sharjah

Hamriyah Free Zone
Sharjah Airport International Free Zone
AjmanAjman Free Zone
Umm Al QuwainUmm 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
FujairahFujairah Free Zone
FOIZ (Fujairah Oil Industry Zone)