Applicability of VAT for Rendering Services to a Designated Zone in UAE

The Federal Tax Authority has published a guide on VAT registration for designated zones. The issuance of this guide is important as it also provides more clarity on the application of VAT transactions with businesses established in designated zones, which has been an important topic for businesses since the introduction of VAT in the UAE.

The UAE cabinet has clarified certain areas as designated zones as eligible for VAT treatment under UAE VAT law.

Also Read: VAT Registration Process for Tax Group in UAE

Criteria for a Free Zone to be Considered as a Designated Zone

  • The zone must be a fenced area.
  • The zone must have its own security measures and internal control unit for monitoring the transfer of goods in and out of the zone.
  • There must be well-defined procedures for the storing, retrieving, and processing of goods within the free zone.
  • The operator of the zone must comply with all the rules and regulations put forth by the FTA.

Specific Forms of Supplies that can be Treated as Services

In UAE VAT computation for goods and services for the designated free zone are defined and classified separately. Executive Regulation of UAE VAT has detailed a few specific forms of supplies which should be treated as a supply of services.

  • Assignment, granting, cessation, or surrender of a right
  • Making available a facility or advantage
  • The transfer of an indivisible share in a good
  • The licensing or transfer of intangible rights, for example, rights of authors, inventors, artists, and rights in trademarks.

Applicability of VAT for Transactions with Businesses in Designated Zones

The FTA guideline clarifies that the supply of services to, or within, a Designated Zone is not subject to any special rules and shall be treated in accordance with the general rules for the VAT in UAE.

  • Services supplied between designated zones

The supply of services between two designated zones is taxable at the rate of 5%. The reason is that the place of supply for services supplied within the designated zone is considered to be within the state. For example, XYZ company located in JAFZA provided IT services to ABC located in DAFZA. The services supplied between the designated zones will attract VAT.

  • Supply of services from designated zone to mainland

The supply of services from a designated zone to the mainland is taxable at 5%. For example, XYZ located in Jebel Ali Free Zones provides IT services to ABC company located in Dubai mainland. The IT services supplied from the designated zone to Dubai Mainland are taxable at 5%.

  • Services supplied from a designated zone to a different country

The computation of VAT for services supplied from a designated zone to another country will be considered as export and will be zero-rated supplies. For example, XYZ company located in jebel Ali Free Zone supplied services to ABC located in India. The supply of services from the designated zone to another country will be considered an export and attract a VAT of 0%.

Applicability of VAT for Services Received by a Designated Zone

  • Services received from another designated zone

Services received from another designated zone in UAE are taxable at 5%. When a designated free zone receives any services from a company located in another designated zone, it will attract VAT of 5%.

  • Services received from mainland

When a designated free zone receives any services from a company located on the UAE mainland, it is taxable and should be charged 5% for rendering such services.

  • Services received from outside the UAE State

Services received in designated zones from outside the UAE state will be taxable on a reverse charge basis. This implies that the recipient of such services needs to account for VAT and pay the VAT liabilities while filing the VAT returns in UAE.

VAT Consultancy Services in UAE

The businesses who are in the services sector need to take extra care in determining whether a supply is taxable or not and whether it is a good or service. This is because services are defined broadly and include intangible property. Understand the VAT treatment for designated zones and have a word with a tax consultant who can help your clear all your doubt. To initiate the process do contact us.