Applicability of VAT for Goods Supplied to Designated Free Zones

UAE free zones are special economic zones, which have their own official government laws, including the federal law and the labor ministry laws. For UAE VAT law, VAT is applicable in certain free zones which are called ‘Designated Zones’. The Executive Regulation prescribes the conditions which a Designated Zone needs to fulfill.

Although designated free zones are part of the UAE territory, for they are to be treated as being outside the UAE for VAT purpose. VAT is imposed on goods and services supplied or imported into the UAE.

Also Read: Applicability of VAT on commercial property and real estate in UAE

Criteria to qualify as a designated free zone

  • It’s a specific fenced geographic area;
  • It has security measures and customs controls in place to monitor the entry and exit or movement of goods to and from the area;
  • Availability of internal procedures regarding the method of keeping, storing and processing of goods within the area;
  • The operator of the designated zone agrees to comply with all the procedures set out by the Federal Tax Authority (FTA).

VAT obligation for businesses established within designated zones

  • Businesses established within a designated zone may be required (or may decide voluntarily) for VAT Registration, file VAT returns and pay VAT under general VAT rules.
  • A business can become a member of a VAT group with other businesses in UAE, provided all the conditions of VAT group are met.

VAT Rates for goods supplied to and from Designated Zones

Type of suppliesFromToTaxability/rate
GoodsDesignated zoneDesignated zoneNon taxable
GoodsDesignated zonemainlandTaxable at 5% VAT
GoodsMainlandDesignated zoneTaxable at 5% VAT
GoodsDesignated zoneOversea/GCCNon taxable
GoodsOversea/GCCDesignated ZoneNon taxable

 

Supplies of goods between designated zones will not subject to VAT only if the following condition are fulfilled:

  • Goods are not used or altered during the transfer between the Designated Zones.
  • The transfer of goods is undertaken in accordance with the rules of GCC Common Customs Law

Self-Consumption of goods supplied to a designated zone

In case the supply of goods made within a Designated Zone is to be used either by the owner or a third person, the goods are subject to VAT at 5%. However, there are certain scenarios where the consumption of goods within a Designated Zone is not subject to VAT. The following are the exceptions:

  • Goods which are incorporated into other goods,
  • Goods attached to other goods,
  • The usage of goods is such a way that they take the form of other goods,
  • Goods are used in the production or sale of other goods located in the same Designated Zone.

VAT regulation for rendering services from a designated zone

There is a differential treatment for supply of goods and for the supply of services between Designated Zones. While the supply of goods between the Designated Zones is not subject to tax, it is not true in the case of supply of services. This implies that any service supplied from a Designated Zone to another Designated Zone, the standard rate of VAT at 5% will be levied.

VAT treatment for VAT groups

Where a supply of goods is between VAT group members and results in goods being moved from a designated zone to the UAE main land, it will be considered an import of goods and trigger the obligation to pay VAT.

VAT Registration services in UAE

The applicability of VAT for goods in UAE free zones can be difficult to assess without the guidance of experts. Fortunately, VAT agents in UAE can be assessed and they provide all the essential information on the implementation of VAT for business. If you have any questions on VAT in UAE or how to register for VAT, they are the people to call.