The UAE introduced Value Added Tax (VAT) on January 1, 2018, at a 5 percent rate. The purpose of the VAT introduction was to provide the UAE with a new source of income that will continue to utilize to deliver high-quality public services.
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VAT treatment or VAT applicability implies those goods that will take place within the territorial area of the UAE as a general tax consumption on the supply & import of goods and services. However, certain Free Zones listed in a Cabinet Decision qualify for special VAT treatment or applicability & these selected Free Zones are known as Designated Zones for VAT purposes.
VAT treatment or VAT applicability implies tax-registered businesses operating on the UAE mainland and free zones. However, the free zones defined as designated zones by the UAE Cabinet must be treated as outside the UAE for tax purposes such as internal procedures and required security measures.
The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published a guide on the Value Added Tax (VAT) treatment of Designated Zones.
Since the VAT introduction, the process of VAT applicability to transactions with businesses established in Designated Zones used to be a big concern for businesses.
What are Designated Zones?
As we all know, many businesses in free zones in the UAE are getting benefits or reliefs subject to the condition of the respective license authority. Some of those free zones were nominated as designated zones by the UAE Cabinet & should consider outside the state for VAT applicability or VAT treatment.
As per the UAE VAT law, such designated zones have a special VAT treatment.
It is important to note that not all Free Zones consider Designated Zones, & not all Designated Zones will necessarily comply with the conditions for special treatment in every case.
Vat applicability / Vat treatment on services in designated zones
The Vat applicability or VAT treatment to any tax services on goods supplied inside the designated zone will be similar to the services provided within the mainland. Thus, the service provider inside and outside the designated zones is subject to Vat applicability or VAT treatment with a tax rate as per the category applied.
Vat applicability / Vat treatment on taxable goods supplied from the designated goods
Here are different scenarios of supply of goods and the VAT applicability or VAT treatment on these goods:
Supply of goods:
a) Between & within the designated goods:
In this case, the goods supplied and imported within and from designated zones for self-consumption are VAT treated & the supply of goods from and within the designated zones for additional supply purposes is out of tax applicability or VAT treatment.
b) From designated zones to the UAE mainland:
Here, the goods supply from designated zones to the UAE mainland. The importer of goods is subject to VAT treatment or VAT applicability and remits the amount to FTA & the supplier should not charge the VAT on the invoice of the customer importing the goods.
In some cases, by importing goods from designated zones to the mainland, the freight forwarder will clear the VAT applicability or VAT treatment on behalf of the customer. The freight forwarder agent might vacate the goods from the custom portal by paying the tax or through an agreement with the customer importing the goods; The customer will receive the imported goods with the statement given by the freight provider.
c) From the designated zone to the rest of the world:
Here, the goods are supplied outside the UAE mainland and will be outside the scope of VAT treatment or VAT applicability.
d) Goods supplied from outside the UAE State into Designated Zone
Goods purchased into Designated Zone from outside the UAE State will not be considered as imports and will be out of the scope of UAE VAT. As a result, there will be no VAT implications on such purchases.
e) From UAE mainland to Designated zones:
Any goods imported from the UAE mainland to a designated zone comply with VAT applicability or VAT treatment as per VAT rules of the UAE; The supplier must charge the VAT at the standard rate unless the goods are exempted or zero-rated.
Conclusion
The purchase of goods from the mainland (inside the state of UAE) are not considered as exports, meaning VAT 5% will be applicable on such purchases. Secondly, purchase of goods from outside the state is not considered as imports and will be out of the scope of UAE VAT.
The VAT tax system encourages a tax law-abiding business setting. The VAT treatment/ VAT applicability, whether on imported or exported goods, is a way the UAE brings an effective solution to reduce the country’s dependency on oil. You can get any VAT-related help from our professional experts.
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