VAT Registration for Free Zone Companies in UAE | Definition, Application, Compliance and Rules

The UAE standard VAT rate is 5% on the supply of most goods and services. Both mainland and free zone areas in the UAE fall within the scope of the UAE VAT legislation, unless explicitly exempted. This article explains how VAT impacts businesses operating within UAE free zones, stating registration requirements, available exemptions, and the specific designated zones recognized under the UAE VAT law.

Free Zones vs Designated Zones: Key Definition

A Free zones is a special economic area where businesses can benefit from custom duty among other tax exemptions. However, for VAT purposes, not all free zones are treated the same. 

Designated zones are zones which are outside the UAE scope of VAT for some trade in goods. VAT exemption is, however, under terms and conditions and to qualifying goods and not services:

A zone must:

• Be fenced and secured.
• Have stick control over the movement of goods in and out.
• Operate under the oversight of a customs authority.

Dubai Airport Free Zone (DAFZA), Jebel Ali Free Zone (JAFZA), Hamriyah Free Zone, etc., are a few of the Designated Zones. The FTA is to issue the list of the Designated Zones from time to time.

Do Free Zone Companies have to Register for VAT?

Yes, certain free zone companies will be required to register for VAT, depending on the nature of the trading activity and the extent of their annual turnover.

Compulsory VAT Registration

A VAT registration is compulsory if:

• Taxable supplies and imports in the preceding 12 months have exceeded AED 375,000, or
• The business anticipates surpassing this threshold in the next 30 days.

This encompasses supplies to the mainland UAE, the same free zone, or other free zones (even designated).

Voluntary VAT Registration

Free zone firms can also be registered on a voluntary basis when taxable supply or expenditure during a year goes over AED 187,500. It is advantageous to small and medium enterprise business along with start-ups for the purpose of recovery of input VAT along with for attaining integrity in the business partner along with suppliers.

VAT registration for free zone companies in UAE is never compulsory by option. Most businesses are either compelled to register below the threshold, or voluntary registration will be beneficial for them.

VAT Application on Free Zone Businesses in UAE

VAT application on free zone businesses has some essential issues to address:

1. Transfers Within the Same Designated Zone

• Where the supply is within one Designated Zone, and between registered buyer and supplier businesses, except for the exception of intra-zone transfer of goods being supported, VAT is not zero-rated.
• Where the supply is a service, VAT is payable, even within a Designated Zone.

2. Between Different Designated Zones

• Supplies between other Designated Zones are zero-rated for VAT, subject to the condition that goods do not clear to the mainland and subject to conditions.
• But once the goods or services are on the mainland, VAT should be applied.

3. Supplies to Mainland UAE

• Where the supply is from the Designated Zone business to a mainland business, or to a mainland customer, VAT is due at 5% standard rate.
• The Designated Zone business will then be required to register for VAT and to emit a VAT-compliant tax invoice.

4. Supplies to Free Zone Businesses on the mainland

Where a supplier on the mainland is making a supply to a business in a Designated Zone, VAT taxable supply will be generated because the supply is being made from the mainland in the UAE.

Also Read: VAT Compliance for Businesses in the UAE

VAT Compliance for Free Zone Companies in UAE

Either in their zone or otherwise, if VAT registered, free zone companies are required to fulfill all VAT requirements, including:

• Issuance of tax invoices on taxable supplies
• Filing of VAT returns quarterly or monthly (as assigned)
• Maintaining records for a period of up to 5 years properly
• Refund of VAT paid to FTA within a prescribed time limit
• Recovery of input VAT according to rules by FTA
• Default will attract administrative penalties, penalty or cancellation of trading license

VAT Rules for Free Zone Companies in UAE

To remain compliant with VAT rules for free zone companies, businesses are required to:

• Determine zone classification: Check if the free zone is a Designated Zone as per the FTA.
• Assess your taxable turnover: Review past and future anticipated receipts when considering registration or not.
• Understand transaction types: Identify whether you’re providing goods, services, or both.
• Make records in case: Make tax invoices, agreements, and delivery/export documentation.
• Get tax advice: Due to the fact that policies are hard to comply with, especially if selling off-shore or on-line.

Seek the Expert Services of Premier VAT Registration in UAE

Under UAE VAT law, VAT is imposed uniformly across all sectors, requiring businesses to register and file for VAT. To effectively determine VAT taxability and ensure compliance with VAT requirements and regulations, it is advisable for businesses to seek the expert services of premier VAT Registration in UAE. Contact us today and we shall be glad to assist you. 

Also Read: Benefits of Hiring VAT Consultants in Dubai