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All you need to know about Designated Zones in the UAE

By Ananya - 23 Nov 2021 Last Updated: 09 May 2022
All you need to know about Designated Zones in the UAE

Table of Contents 

  1. 1. In Designated Zones, how is VAT Policy Regulated?
  2. 2. In The UAE, how are VAT Regulations for Designated Zones Regulated?
  3. 3. Treatment of VAT on Services Provided in a Designated Zone
  4. 4. Supply of water or any other source of energy to a designated zone is subject to VAT.
  5. 5. Supply of goods to the Designated Zone for self-consumption
  6. 6. Goods located in Designated Zone on which VAT is not Paid
  7. 7. List of Designated Zone in UAE
  8. 8. Conclusion

A Designated Zone is an area that has been designated by cabinet decision and meets the requirements of the UAE Executive Regulation. To put it another way, the Designated Zone is a VAT-free zone that is deemed outside the UAE for VAT purposes. As a result, no VAT will be charged on any items transferred between Designated Zones.

In Designated Zones, how is VAT Policy Regulated?

The Value Added Tax (VAT), which went into effect on January 1, 2018, is a general consumption tax on goods and services. This rule applies to any supplies exchanged within the UAE's geographical area.

When it comes to the UAE VAT designated zones, however, there is an exemption to this provision. One of the reasons is that, because these jurisdictions are gated, supply of products transferred to or from a defined zone may be inspected. Other jurisdictions, such as the mainland and Freezones, are, on the other hand, open. As a result, observing and regulating the transfer of goods across jurisdictions for VAT purposes is more difficult.

In The UAE, how are VAT Regulations for Designated Zones Regulated?

VAT is not charged on products that are transported between and within defined zones. (If certain requirements are met)

The Export and Import of goods between a designated zone and a foreign corporation are also exempt from VAT. (Assuming proper controls, processes, and records are in place)

As a typical local supply, items transferred from the mainland/free zones to designated zones are subject to 5% VAT.

Transfers of products from designated zones to the Mainland/free zones are considered imports and are subject to a 5% VAT under the reverse charge system.

An investor, for example, may wish to provide professional services from one VAT-free zone to another. The owner of the firm will be obliged to pay 5% VAT. In contrast, if the investor wants to supply professional services outside of the United States, he or she must seek for a 0% VAT rate. This, however, does not apply to commercial activity.

When does an Investor have to File a VAT Application?

Any natural or legal person conducting business in the UAE and making taxable supplies is required to register for VAT at the following rate:

Registration is Required:

If taxable supplies totaled more than AED 375,000 in the previous 12 months, or if taxable supplies are expected to total more than AED 375,000 in the following 30 days.

Voluntary Registration:

voluntary registration is a type of registration that is If a firm does not match the above-mentioned mandatory registration standards, it may apply to register for VAT.

If taxable supply or taxable spending exceeded AED 187,500 in the preceding 12 months, or if taxable supplies or taxable expenditure is expected to exceed AED 187,500 in the following 30 days.

Read More: Starting a Business in Dubai as a foreigner? Here is all you Need to Know

Treatment of VAT on Services Provided in a Designated Zone

Between Designated Zones, there is differential treatment for the supply of commodities as well as the supply of services. While the delivery of commodities between Designated Zones is tax-free, the same cannot be said for the supply of services. The rationale for this is that if the place of supply is in the Designated Zone, it is inside the State of UAE. This means that any services provided from the mainland to the Designated Zone or inside the Designated Zone will be subject to the usual rate of VAT of 5%.

VAT terms and conditions Supply of products between Designated Zones is unrestricted.

Only if the following conditions are followed will supplies between the Designated Zones be exempt from VAT:

  • The products are not released during the transfer between the Designated Zones
  • The goods are not utilized or altered in any way during the transfer between the Designated Zones
  • The goods are transferred in compliance with the GCC Common Customs Law's provisions for customs suspension

In addition to the conditions that must be met for VAT-free supplies of goods between Designated Zones, the authority may ask the owner of the goods to provide a financial guarantee for the payment of any tax for which that person may be held liable if the conditions for movement of goods are not met.

Supply of water or any other source of energy to a designated zone is subject to VAT.

Though water and all forms of energy are regarded to be suppliers of products, these supplies are differentiated from other items and treated differently in the Designated Zone. If the source of water or any other sort of energy is located within a Designated Zone, it is deemed to be within the State. This means that the supply of water and all forms of energy to the Designated Zone will be subject to VAT at 5%, just like it is in non-Designated Zone areas of the UAE.

Supply of goods to the Designated Zone for self-consumption

If items created in a Designated Zone are to be used by the owner or a third party, the place of supply will be in the United Arab Emirates. This means that any self-consumed goods sold within Designated Zones will be charged a 5% VAT. However, there are some unusual circumstances in which items consumed within a Designated Zone are not subject to VAT. The following are examples of exceptions:

  • Goods are incorporated into other goods,
  • Goods are attached to other goods,
  • Goods are utilized in the manufacture or sale of another good, and
  • Goods are used in the production or sale of another good.

Goods located in Designated Zone on which VAT is not Paid

The consumption of goods located in a Designated Zone on which the owner has not paid VAT will be treated as imported into the State by the owner and will be subject to VAT if they are unaccounted. However, if these goods are consumed by the owner in the scenarios listed above (self-consumption scenarios) will not be subject to VAT.

List of Designated Zone in UAE

Emirate

Designated Zone

Abu Dhabi

Free Trade Zone of Khalifa Port

Abu Dhabi Airport Free Zone

Khalifa Industrial Zone

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

Sharjah

Hamriyah Free Zone

Sharjah Airport International Free Zone

Ajman

Ajman Free Zone

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

Ras Al Khaimah

RAK Free Trade Zone

RAK Maritime City Free Zone

RAK Airport Free Zone

Fujairah

Fujairah Free Zone

FOIZ (Fujairah Oil Industry Zone)


Conclusion

It's obvious that the VAT treatment of supplies related to Designated Zones varies depending on the type of supply. To begin with, the benefit of VAT exemption is only accessible scenarios for the delivery of products, while the supply of services within the Designated Zone is taxed. Second, conditions set forth in UAE Executive Regulations must be followed to be eligible for VAT exemption on products supplied within the Designated Zones. As a result, it is critical for businesses to understand the VAT treatment of their supply, analyse the impact of VAT on their business, and plan accordingly. To learn more you can connect to our experts at Dhanguard.

Dhanguard provides the business setup and company formation services in Dubai, UAE with the guidance of our professional team of consultants. Faster and hassle-free company setup in Mainland and Freezone in UAE.

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