Designated zones in UAE are areas that are specified by UAE Cabinet Decision, as per UAE VAT law, and they have special treatment for VAT purposes. As their areas are considered as outside UAE’s territory for the purpose of VAT, supplies that are made from within or outside designated ones are VAT-free (subject to certain conditions and some exceptions).
The UAE VAT Federal-Decree Law has specified the free zones that have been marked as designated zones. For those that were not mentioned, they’ll still be marked as designated zones, provided that they fulfill these criteria:
- Zones are fenced areas
- Zones have their own security measures, as well as customs control units intended for monitoring and surveillance of the movement of goods and individuals in and/or out of the zones
- There are well-defined regulations that are implemented within the zones for the storage, retrieval, and processing of products within the zones
Note: the guidance of regulated tax agents in Dubai is best sought for proper VAT accounting in UAE and regulatory compliance.
VAT Treatment for Supply of Services in Designated Zones
Under standard rules related to VAT in UAE, if the place of supply of services has been within a designated zone, then the supply of services took place in UAE. In such cases, almost all services are subject to VAT with a standard rate of five percent. If the services are exported or made to individuals or legal entities that are residents of countries apart from the GCC states, services will be considered to be zero-rated.
Read also: VAT Treatment For UAE Transportation
VAT Treatment for Supply of Goods in Designated Zones
The supply of goods in designated zones isn’t subject to VAT charges because the locations of the supply are outside UAE territory. The standard rule for such isn’t valid if the supply has been made in a designated zone onto a person that intends in utilizing goods, for whichever way, for private purposes. Place of supply, in this case, will be considered as within UAE territory with supply subjected to the normal VAT charge.
If a buyer plans on reselling purchased goods or using them in manufacturing or producing other goods, supply is considered as outside UAE VAT scope. Goods that are being purchased should have direct conductions with goods that are being manufactured or produced for supply to be seen as outside UAE VAT scope. For instance, a hardwood that is used in making furniture is considered to be outside VAT scope as it has a direct connection with goods that are being manufactured.
But, a computer that is used in creating a plan for construction of a commercial or residential building isn’t considered as outside VAT scope as the computer doesn’t have a direct connection with a building’s construction. If a buyer acquires goods within designated zones and attaches the goods to other goods within the same designated zones in a way both form final products, supply would be seen as outside UAE VAT scope.
- A business in a designated zone purchases office supplies such as stationery and office furniture. Transaction(s) will be considered as within UAE VAT scope as goods are purchased will be consumed directly by the business and won’t be utilized in producing other goods which will be sold.
- An individual consumer purchases goods within a designated zone for private use. It will be within UAE VAT scope as goods aren’t used for private purposes and not for business. VAT, in such a case, is applicable.
- A business buys some tools in order to manufacture products that will be sold within designated zones by the manufacturer. It is outside UAE VAT scope even though tools are utilized by the manufacture as they are used in producing other goods which aren’t consumed by the business or manufacturer.
Treatment of Goods Transfer to a Designated Zone from Outside UAE Territory
A designated zone isn’t considered as a territory of the UAE. Supply of goods to designated zones from anywhere outside UAE and the GCC implementing states would be considered as supply that takes place outside UAE. VAT will not be levied for such.
VAT Treatment for Transfer of Goods to Designated Zones from UAE Mainland
The movement or supply of goods to designated zones from the UAE mainland isn’t considered as goods exportation but a local supply or movement instead. It is, therefore, subject to the appropriate VAT charges.
Read also: Penalty For Voluntary VAT Disclosure In UAE
VAT Treatment for Transfer of Goods/Products Between Two Designated Zones
The supply or movement of goods or products between two or more designated zones will be outside UAE VAT scope if the following criteria are met:
- Goods that are being transferred won’t be used, modified, or tampered with in any way conceivable
- The transfer process is in accordance with regulations for suspension by customs per Common Customs Law in GCC
The Federal Tax Authority in UAE may require a financial guarantee that’s issued from the owner of goods if the aforementioned conditions aren’t met.
For more information regarding VAT in UAE, talk to the regulated tax agents of VAT Registration UAE today!