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Wondering how the VAT regulations work for designated zones in the UAE? This blog will inform you about everything you need to know about it.

What are designated zones?

A UAE VAT Designated Zone is an area assigned by the Cabinet Decision to be considered as outside the UAE for Value Added Tax (VAT) purposes. These territories are designated to offer tax incentives to businesses. Moreover, in order for this to happen, a number of conditions need to be met. These conditions include:

  • Gated territories:

Designated Zones are required to be fenced off. It should be done so with safety measures as well as customs controls in place to screen entry and exit of people and goods transferred to and from the zone.

  • Processing policy of internal goods:

The zone must have internal methodology in regards to storage, keeping, and processing of goods.

  • Tax compliance:

Administrators of a Designated Zone must comply with the requirements set by the Federal Tax Authority (FTA).

How is VAT policy regulated in designated zones?

Value Added Tax, introduced on 1st January 2018, has been implemented as a general consumption tax of goods and services. This applies to all supplies which are exchanged within the territorial area of the UAE.

However, there is an exception to this rule when it comes to the UAE VAT designated zones. One of the reasons is because supplies of goods transferred to or from a designated zone can be observed in these jurisdictions since they are gated. On the other hand, other jurisdictions such as mainland and free zones are open. Hence, it is more complex to observe and regulate the transfer of goods between jurisdictions for VAT purposes.

How VAT policies are regulated in the UAE for designated zones

  • Any goods that are transferred between and within designated zones are not subject to VAT. (subject to conditions being met)
  • Exportation and importation of goods between a designated zone and a company overseas are also not subject to VAT. (subject to correct controls, process and records being in place)
  • Transfer of goods from mainland/free zones to designated zones are subject to 5% VAT as a normal local supply.
  • Transfer of goods from designated zones to mainland/free zones are treated as imports subject to 5% VAT based on reverse charge mechanism. 

The above rules, however, are not applicable to services. In this case, regardless of where the service is provided — UAE mainland/free zone or designated zones — the process is taxable for VAT by 5%. This is because services cannot be regulated. Therefore, by default, it will be subject to 5% VAT. Moreover, the place of supply for services is considered to be within the state.

For instance, an investor wants to provide professional services from one VAT-free zone to another. The businessowner will be required to pay 5% VAT. In contrast, if the investor wants to provide professional services overseas, he/she will have to apply for 0-rated VAT. However, this isn’t applicable for commercial activities.

When does an investor have to apply for VAT?

Any individual (natural or legal) carrying on a business activity in the UAE and making taxable supplies should register for VAT based on the following threshold:

Mandatory registration:

  1. If taxable supplies exceed AED 375,000 during the last 12 month period, or
  2. If estimated taxable supplies are more than AED 375,000 in the next 30 days.

Voluntary registration:

A business may apply to register for VAT if they do not meet the mandatory registration criteria as above and:

  1. If taxable supplies or taxable expenditure in the previous 12 months exceeds AED 187,500, or
  2. Estimated taxable supplies or taxable expenditure will exceed AED 187,500 in the next 30 days.

List of designated zones in the UAE

According to the Cabinet Decision No. 59, the following free zones are treated as designated zones in the UAE. Hence, these free zones conform to special rules and regulations.

  • Free Trade Zone of Khalifa Port
  • Abu Dhabi Airport Free Zone
  • Khalifa Industrial Zone
  • Al Ain International Airport Free Zone
  • Al Butain International Airport Free Zone
  • Jebel Ali Free Zone (North-South)
  • Dubai Cars and Automotive Zone
  • Dubai Textile City
  • Free Zone area in Al Quoz
  • Free Zone Area in Al Qusais
  • Dubai Aviation City
  • Dubai Airport Free Zone
  • International Humanitarian City – Jebel Ali
  • Hamriyah Free Zone
  • Sharjah Airport International Free Zone
  • Ajman Free Zone
  • Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
  • Umm Al Quwain Free Trade Zone on Sheikh Mohamed Bin Zayed Road
  • RAK Free Trade Zone
  • RAK Maritime City Free Zone
  • Fujairah Free Zone
  • RAK Airport Free Zone
  • FOIZ (Fujairah Oil Industry Zone)

Set up your free zone company with Shuraa Business Setup now!

If you’re interested in setting up your designated free zone company in the UAE, look no further. Shuraa will help you get started with your company and ensure that the entire process runs smoothly.

Shuraa has been one of the leading business setup companies in the UAE for over 20 years. Furthermore, our goal is to help entrepreneurs build a foundation in the UAE’s thriving economy, from start to finish.

Our expert consultants will guide you through the entire process — from registering your business and helping you understand UAE VAT designated zones, all the way to the process of obtaining approvals from relevant authorities.

To get in touch with our expert business consultants, call us on +97144081900. Send a WhatsApp message for a chat query on +971507775554. You can also email us at [email protected]. You can also get in touch with our international tax experts, visit https://bit.ly/2Wphtcq.

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