The Federal Tax Authority (“FTA”) published On 29 July 2018, a VAT Guide on Designated Zones – VAT Guide (VATGDZ1). Designated Zone is an area which is specified by the cabinet decision and that meets the conditions prescribed in the UAE Executive Regulation.
A designated zone is a place which is considered to be outside the UAE for tax purposes. VAT will not be levied on goods which are imported directly to a designated zone. Tax is applied on these goods only when they are out of the designated zones.
Although an area might be identified as a Designated Zone, it is not automatically treated as being outside the UAE for VAT purposes. There are several main criteria which must be met in order for a Designated Zone to be treated as outside the UAE for VAT purposes.
These are as follows:
- The Designated Zone must be a specific fenced geographic area.
- The Designated Zone must have security measures and Customs controls in place to monitor the entry and exit of individuals and movement of goods to and from the Designated Zone.
- The Designated Zone must have internal procedures regarding the method of keeping, storing and processing of goods within the Designated Zone.
- The operator of the Designated Zone must comply with the procedures set out by the FTA.
This means that where a Designated Zone has areas that meet the above requirements, and areas that do not meet the requirements, it will be treated as being outside the UAE only to the extent that the requirements are met.
There are more than 30 free zones in the UAE. However, more than 20 of the free trade zones have been categorized as designated zones for the VAT purposes. Only the free zones nominated as per the Cabinet Decision No 52/2017 are considered as designated zones. In general, free zones are not outside the scope of VAT but special rules apply for the free zones categorized as designated zones by the Federal Tax Authority. The foreign investors need to know how VAT applicability differs in designated free zones and non-designated free zones before they choose any free zone in the UAE.
VAT treatment on supply of Goods related to Designated Zones
The supply of goods will be tax-free subject to certain conditions and depending upon the place of supply, though it is treated as outside the State, not all supplies will enjoy this benefit, some supplies still attract VAT at 5%
The below Chart shows the VAT applicability on supplies made from/to the Designated Zones.
Note: Mainland here refers to place in UAE except the Designated Zones
Transaction of goods between Designated Zones will be considered as outside the scope of VAT if two of the following conditions are fulfilled:
- The goods should not be released into circulation either in part or in full; it should not be modified in any way during the transaction.
- The transaction should take place as per the rules for Customs suspension in accordance with the GCC Common Customs Law.
VAT treatment on Supply of Services related to Designated Zone
Further, it needs to be noted that if any services provided in the designated zones will be considered as provided in UAE and are chargeable to VAT at 5%. The reason being, the place of supply of services is considered to be inside the State of UAE if the place of supply is in the Designated Zone. This implies, any services whether supplied from the mainland to Designated Zone or within the Designated Zone, the standard rate of VAT at 5% will be levied. And the same treatment is taken for the supply of water and any form of energy.
Self-consumption of goods supplies to Designated Zone
If the supply of goods made within a Designated Zone is to be used either by the owner or a third person, then the place of supply will be in the State of UAE & will be subject to VAT at 5%. However, in the following exceptional scenarios the consumption of goods within a Designated Zone will not be subject to VAT. Goods are incorporated into other goods,
- Goods are incorporated into other goods,
- Attached to or otherwise form part of or are used in the production of other goods located in a Designated Zone which itself is not consumed.
List of Designated Zone in UAE
Designated Zones in Abu Dhabi
- Free Trade Zone of Khalifa Port
- Abu Dhabi Airport Free Zone
- Khalifa Industrial Zone (KIZAD)
- Al Ain International Airport Free Zone
- Al Butain International Airport Free Zone
Designated Zones in Dubai
- Jebel Ali Free Zone (North-South)
- Dubai Cars and Automotive Zone (DUCAMZ)
- 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
Designated Zones in Sharjah
- Hamriyah Free Zone
- Sharjah Airport International Free Zone
Designated Zones in Umm Al Quwain
- Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
- Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
Designated Zones in Ras Al Khaimah
- RAK Free Trade Zone
- RAK Maritime City Free Zone
- Al Hamra Industrial Zone – Free Zone
- Al Ghail Industrial Zone – Free Zone
- Al Hulaila Industrial Zone – Free Zone
Designated Zones in Fujairah
- Fujairah Free Zone
- FOIZ (Fujairah Oil Industry Zone)
Designated Zones in Ajman
- Ajman Free Zone
It’s clear that VAT treatments for supplies related to Designated Zones are different depending on the type of supplies. Firstly, the benefit of VAT exemption is available only for the supply of goods in certain scenarios and supply of services within the Designated Zone are taxable. Secondly, in order to be eligible for VAT exemption on the supply of goods within the Designated Zones, conditions, as prescribed in UAE Executive Regulations are required to be met. Thus, for businesses, it is really important to understand VAT treatment on supplies carried out by them, assess the impact of VAT on their business and accordingly plan.