Case study on VAT treatment in a designated zone and mainland company in the UAE
According to the UAE VAT Law, the supply of the goods in the UAE mainland is under the preview of VAT provisions, and those goods supplied inside a designated zone are outside the scope of the UAE VAT unless consumed in the designated zone. But practically there are many confusions on the VAT treatments of the supplies between a mainland company and designated zone company. We are trying to explain the concept of the designated zone based on the provisions of the VAT Law and to explain the tax treatment on various practical scenarios to bring better understanding.
Before explaining the VAT treatment for transactions with designated zones, we will explain to you about designated zones and conditions to identify them. It is important that only designated zones that satisfy the conditions as per the UAE VAT Law can be treated with the special rules and in other cases VAT should be applied as in UAE mainland.
What is a designated Zone?
As we know there are many free zones in the UAE where businesses are getting special reliefs or benefits subject to the conditions of the respective licensing authority. Some of those Free Zones are listed by the Cabinet as Designated Zone providing, they satisfy certain conditions, and such designated zones are considered as outside the UAE for VAT purposes. They will have a special VAT treatment for the supply of goods as per the provisions of the UAE VAT Law.
The conditions to be satisfied by the free zones to qualify as a designated zone are as follows:
- It should be specifically a fenced area.
- It should have security control and customs monitoring to identify the movement of goods as well as individuals.
- It should be listed by the cabinet as the designated zone.
- Such a place should comply with the procedures given by the FTA.
So, if all the conditions are satisfied by the freezone then it will be considered as a designated zone for UAE VAT purposes.
UAE VAT designated zones list
Based on cabinet decision No. 59 of 2017 on designated zones for the purpose of the Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments till September 2021, below is the list of the designated zones published by the authority. (note: we recommend checking the list published on the FTA website to see the changes or amendments to it in the future.)
- Free Trade Zone of Khalifa Port in Abu Dhabi
- Abu Dhabi Airport Free Zone in Abu Dhabi
- Al-Ain International Airport Free Zone in Abu Dhabi
- Al Butain International Airport Free Zone in Abu Dhabi
- Jebel Ali Free Zone (NorthSouth) in Dubai
- Dubai Cars and Automotive Zone (DUCAMZ) in Dubai
- Dubai Textile City in Dubai
- Free Zone Area in Al Quoz in Dubai
- DAFZA Industrial Park Free Zone - Al Qusais in Dubai
- Dubai Aviation City in Dubai
- Dubai Airport Free Zone in Dubai
- International Humanitarian City – Jebel Ali in Dubai
- Dubai CommerCity in Dubai
- Hamriyah Free Zone in Sharjah
- 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 Mohammed Bin Zayed Road
- RAK Port Free Zone
- RAK Maritime City Free Zone
- RAK Airport Free Zone
- Al Hamra Industrial Zone – Free Zone in Ras Al Khaimah
- Al Ghail Industrial Zone – Free Zone in Ras Al Khaimah
- Al Hulaila Industrial Zone – Free Zone in Ras Al Khaimah
- Fujairah Free Zone
- FOIZ (Fujairah Oil Industry Zone)
Taxability of service in the Designated Zone:
Any taxable services supplied inside the designated zone will have the VAT applicability as like that of the UAE mainland. So, the services provided inside or from the designated zone will be subject to VAT and the tax rate (5% or 0% or exempt) as per the different categories will apply for them.
Taxability of goods supplied from the Designated Zone:
Let us see different scenarios of the supply of goods from the designated zone and understand the VAT treatment for them.
Case 1): Supply within and between the Designated Zones
Case 2): Supply from Designated zone to rest of the world
Case 3): Supply from Designated Zone to UAE mainland
Case 4): Supply from UAE mainland to Designated zone
In case 1- Supply within and between the Designated Zone can be categorized into two-
a) Intended for consumption.
b) Intended for further supply.
Supplies intended for self-consumption within and between the two designated zones are taxable for UAE VAT and supplies intended for further supply within and between the two designated zones are outside the scope of VAT.
In case 2- Supply from Designated zone to rest of the world-
The supply is considered to be happening outside the UAE mainland and therefore it will be outside the scope of VAT in the UAE.
In case 3- Supply from Designated Zone to UAE mainland
When the goods are supplied from the Designated zone to the UAE mainland, the importer on the records will be responsible for accounting for the VAT and remitting the amount to FTA. If the importer is a VAT registered person and if the TRN is linked with his import code, the value of VAT will be auto-populated in his VAT return inbox no 6 of the VAT return and he can avail input for the same inbox no 10 of the VAT return. In such a case, the supplier in the designated zone should not charge VAT on his invoice and can consider the supply as out of scope of VAT provided the customer accounts and pays the VAT while importing to the UAE.
Sometimes in the supply of the goods from the Designated Zone to the mainland, goods might be cleared by the freight forwarder on behalf of the customer. In such cases, the clearing agent/freight forwarder might have cleared the goods from the customs portal paying VAT or through an agreement with the customer. Then the customer can take input with the statement provided by the freight forwarder/ clearing agent in column number 9 of the VAT return.
In case 4- Supply from UAE mainland to Designated zone
Any supply of goods from the UAE mainland to a designated zone will be subject to VAT as per normal VAT rules as the transaction is happening from the UAE mainland. So, the supplier must charge VAT at the standard rate unless zero-rated or exempt supply.
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Feb 29,2024UAE Corporate Tax Registration
