VAT Registration for Free Zone Companies in UAE

Value Added Tax in UAE  is an indirect tax that’s charged to products and services.  There are three different rates for VAT that are applied to products and services. The standard rate is at five percent,  zero percent (zero rated), and exempt. 

Difference Between Zero Rated VAT and Tax Exempt

Zero rated VAT is not same as VAT exempt. Zero rated vat includes goods that are taxable for VAT but consumers are not charged with VAT. The VAT accounts of business still contain records for sales of zero rated items and they have to be reported to the business’ VAT return. This means VAT for zero-rated items can be claimed by a business as input tax. 

As for VAT exempt goods and services, they are not taxable as they are outside the scope of VAT. A business doesn’t include the sale of any exempt good or service in its taxable turnover for the purpose of VAT in UAE. You cannot reclaim Vat if your business purchases items that are VAT exempt. For both cases, VAT shouldn’t be added to selling prices of goods and services. However, zero rated items are taxable albeit at zero percent. Sale of a zero rated item counts as a taxable sale with respect to the registration threshold together with a sale that is subject for five percent or standard rate VAT. 

Also Read: Steps And Requirements For VAT Registration In UAE

What Free Zone Companies Can Register for VAT?

There is a misconception that only those that are operating limited companies are able to register for VAT in UAE. Any business that reaches the mandatory threshold for UAE registration for VAT has to undergo the process of VAT registration with the FTA. A free zone company in UAE can register voluntarily if its annual taxable supplies reach between Dhs 187,5000 and Dhs 375,000. 

Vat Registration Guidelines

Here are the guidelines that you should remember for VAT registration in UAE:

  • You must undergo VAT registration if your taxable turnover for VAT exceeding the threshold of Dhs 375,000 for a period of twelve months; 
  • You are also to register if your business in a UAE free zone exceeds the VAT registration threshold within a single period of thirty days; 
  • You should also register for VAT in UAE if you only sell products which are VAT exempt but your business purchases products to utilize for the business for the value of greater than the VAT registered suppliers’ threshold in UAE; 
  • You are to undergo VAT registration with the FTA on or before you meet any of the criteria mentioned earlier. 

If your business’ turnover is going to reach the VAT registration threshold, then you should set aside time and resources in completing the registration process. Failure in notifying the tax authority in UAE in time will make the business liable in paying hefty fines and vat penalties

Also Read: Hidden Benefits Of VAT Registration In UAE 

When Should a Free Zone Business Start Charging VAT in UAE?

A Freezone company in UAE can charge VAT when the turnonver of the business reaches the VAT registration threshold, and owned a tax registration number.  If you exceed the threshold for VAT registration in a period of thirty days, then you also have to provide the tax authority in UAE notifications. 

What Happens When I am not Registered for VAT Even When I Should Be?

If the business that is operating in and out of a free zone in UAE is late with the VAT registration process, the FTA will register the business starting from the date that it should have begun charging VAT. There is a fine that will be imposed on the business that has violated VAT registration regulations and the business will have to add the correct rate for VAT to the sales that have been made starting from the retrospective date. If you think that your annual supplies or turnover is going to reach the threshold anytime soon, then you have to talk to a regulated tax agent in UAE for assistance. This is absolutely crucial if you have no idea when your business should register and if It has already reached the threshold.  

Is it Best to Consider Undergoing Voluntary UAE VAT Registration?

A business in UAE free zone should consider undergoing voluntary registration for VAT. Businesses will be able to reclaim VAT that is paid on its expenses. A business that registers voluntarily can also reduce administration that is involved with the preparation of quarterly VAT returns. Your clients can also be benefited if you are vat registered. They can easily reclaim VAT vat for what they have purchased from your business.