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Designated Zone in UAE

What is the meaning of VAT exempted Free Zone in UAE? – Designated Zones in UAE

The Federal Tax Authority (FTA) is the governing body for issuing all guidelines for the Value-Added-Tax registration, return filing, and other general VAT related amendments in UAE.

FTA has published a guide on Value Added Tax in Designated Zones. It aims to provide clarity on the way VAT is applied to companies in the Designated Zones.

Many business investors want to know the way VAT is levied in Designated Free Zones of UAE.

What are Designated Zones?

The UAE Cabinet has defined the Designated Zones as the area outside the scope of VAT in UAE.

Not all Free Zones are categorized as Designated Zones and there are certain criteria to be met for designated free zones too for exemption of VAT.

Designated Zone in UAE

The VAT rules for Designated Free Zone is slightly complicated as there a lot of case to case basis transactions across a company in a designated free zone with other companies in UAE and Overseas that may be VAT payable.

IT is advisable to get associated with an expert VAT Consultant to be aware of the VAT rules for a Designated Company and compliance procedures to be followed during every transaction.

Things to Consider while operating a Business in a Designated Zone

1. Delivering Services by a Mainland Supplier

If the service is offered in a Designated Zone, the place of supply is treated as UAE (similar to other Free zone and Mainland Companies based in UAE).

Hence, there are no special rules for any exemption of VAT for the services offered in the Designated Zones. It will be taxed according to the regular VAT rules as applicable to the transaction.

2. Delivering Goods within a Designated Zone

The case where both the supplier and consumer are in the Designated Zone will be generally out of the scope of VAT.

However, if the supply is to be consumed within the Designated Zone it is subjected to VAT.

3. Transfer of Goods into a Designated Zone

Following general rules will apply while a company transfer goods into a Designated Zone:

4. From Overseas to Designated Zone:

It is out of VAT scope as the goods are not reaching UAE but moving from one country to another. The company based in UAE is just facilitating global trade.

5. From Mainland UAE to Designated Zone:

It is treated as a taxable transaction as the movement of goods is within UAE and is not considered as an export from UAE.

6. Transfer of goods between Designated Zones

It is treated out of the scope of VAT as the goods are not used or altered during the transfer between the designated zones. It is to be noted that the transfer of goods must be compliant with the UAE Customs Laws.

7. Import of Goods from Designated Zones

The movement of goods from a designated zone to the mainland is considered as an import into UAE. Hence it is taxable and seen as an import.

VAT Free Zone

As per the UAE Cabinet decision areas such as the Free Trade Zone of Khalifa Port, Jebel Ali Free Zone, and 20 Free Zone in the UAE will be exempt from VAT.

VAT on Selected Industries* – An Overview

Industry Sector Description VAT Levied (%)
Telecommunications and Electronic Services   5%

 

Government Activities   Considered outside VAT Scope

 

Not-for-profit Organization   Considered Outside VAT Scope
Oil and Gas Crude Oil & Natural Gas – Zero
Other Oil & Gas Products including Petrol at the pump 5%
Property Sale and rent of commercial buildings (not residential buildings) 5%
First sale/rent of residential building after completion of construction Zero
Hotels, motels, and service accommodation 5%
Investment, gold, silver, platinum jewelry   5%
Transportation   Zero
Financial Services   Exempted from VAT
Education Private and public school education and related goods and services Zero
Education provided by private higher educational institutions and related goods and services 5%
School uniforms, stationery, electronic equipment’s, renting of the school ground, after-school activities fees, school trips for recreation, etc., 5%
Healthcare preventive healthcare including vaccinations, healthcare services Zero
Medicine, medical equipment’s listed in Cabinet Decision Zero
Medicines, medical equipment’s not listed in Cabinet Decision 5%
Other medical supplies 5%
Elective surgeries, cosmetic surgery, etc., 5%
Insurance and reinsurance Insurance for Health, motor, property 5%
Life Insurance and life reinsurance Exempted from VAT
Food and Beverages 5%
Others Export of goods and services to the outside GCC region Zero
Second-Hand Goods (Used cars sold by retailers, antiques, and collectors’ item) 5%
  • Note the list is not exhaustive, please check the FTA website for more information

The scope of VAT in the UAE is large. For Designated Zones themselves, there are certain criteria to be fulfilled for the tax exemptions.

For example, the sale or lease of commercial or residential property located in any UAE Designated Zone is out of the scope of VAT. Similarly, there are many cases of VAT exemption as well as VAT Payable in UAE Designated Zones.

How is VAT Applicable in UAE Designated Zones for Service Companies?

As the place of supply of services is within UAE even though it is in a Designated Zone, the Federal Tax Authority states that the transaction is liable for the 5% standard VAT Charges.

VAT Free Zone in UAE

The same is applied even if the service is rendered in other Designated Zones, Free Zones, or in the mainland.

Thus in every scenario, UAE businesses must understand the process of applying VAT to their business activities and daily transactions. The impact assessment of VAT on their business entity is crucial for long term sustainability.

Connect with our VAT Experts to know more about VAT registration, VAT Return filing, and any VAT related queries!

Contact: Aurion Business Consultants