Understanding Designated Zone
Designated Zones under article 51 of the VAT Regulations are usually referred to as specified “Fenced Free Zones” placed under Customs control.
Now let’s have brief about Freezone. Freezone are that part of UAE which is excluded from the scope of UAE territory. However UAE Cabinet has nominated certain Free zone as Designated Zone for whom VAT has some special treatment.
Any Designated Zone specified by a decision of the Cabinet shall be treated as being outside the State, subject to the following conditions as set by authority:
- The Designated Zone is a specific fenced geographic area and has security measures and Customs controls in place to monitor entry and exit of individuals and the movement of goods to and from the area
- The Designated Zone shall have internal procedures regarding the method of keeping, storing and processing of goods therein
- The operator of the Designated Zone complies with the procedures set by the Authority
VAT Applicability over Movement of “Goods” in Designated Zone
VAT status of a company in designated zone raises some complex issues in terms of its applicability. There are some special rules for applicability of VAT with regards to some transaction. Such transactions are listed below:
- Supply between a Company in Designated Zone to another company in Designated Zone
Any movement of goods takes place within the companies in designated zone shall be treated as Out of the Scope supplies and VAT is not applicable over them
However there is some strict control over movement of goods in such fenced area set by the authority. A deposit shall be required to be paid to authority as security before making the movement of goods. After the supply takes place, a proof shall be submitted and the deposit will be returned.
There is an exception to movement of goods in between designated zone above as mentioned above
Goods subject to be consumed in Designated Zone will be taxable at the rate of 5 %. This is to make sure that no business will take advantage in the name tax evasion set for the companies in Fenced area. For example, If a company is running a grocery or hotel in designated zone, Any transaction made by them shall be subject standard vat at 5%.
- Import made by a company in Designated Zone
Any import of “goods” made by a company from outside UAE to a designated zone is regarded as out of the scope for VAT.
Hence, VAT won’t be levied on such supplies.
- Movement of “Goods” from Designated Zone to Mainland
If a company established in designated zone makes supplies to any company in mainland, then the collection of VAT depends upon 2 criteria
- If the Mainland Company has done its VAT registration Company, then they should regarded it as an import and will be liable to pay VAT on Reverse Charge Mechanism. The seller i.e., company in Designated Zone need not collect VAT
- If the Mainland Company is a Non VAT registered Company, then the seller i.e., company in designated zone shall charge VAT at 5%
VAT Applicability over “Services” in Designated Zone
As far as VAT applicability for any business in services industry is concerned, no special rules is applicable for businesses dealing with goods mentioned above. Therefore all services will be liable to VAT at the standard rate, as if they are applicable within the UAE.
Where any services provided by companies outside UAE, such services are regarded as zero-rated supply.
If services received by any company in designated zone from outside UAE, then company shall pay VAT by applying Reverse Charge Mechanism.
Likewise any services received by a company in designated zone from a company in designated zone or a company located at mainland, VAT shall be charged at the rate of 5% from such recipient of service.
VAT Recovery by company Designated Zone
Input tax recovery over expenses incurred for taxable supplies will be recoverable for any Business in Designated Zone at normal rules.
- If a business makes supplies which are liable to VAT, it should be able to recover the VAT paid on such expenses in full which are directly attributable for that taxable supply
- Where supplies are made which are exempt from VAT then business is not eligible to recover VAT paid on any expense incurred by them
- If any expense relates to both supplies (i.e. taxable or exempt) that give right to the VAT recovery and those that do not, the business would require apportioning the input tax in order to identify the recoverable part
List of Designated Zones in UAE
- Free Trade Zone of Khalifa Port
- Abu Dhabi Airport Free Zone
- Khalifa Industrial Zone
- 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
- Hamriyah Free Zone
- Sharjah Airport International 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 Free Zone
- FOIZ (Fujairah Oil Industry Zone)
The blog post is written by Mr. Nadeem, Tax Advisor at Flyingcolour Accounting & Tax Services, who loves to guide and help clients and resolve their queries related to tax applicability in designated zones in UAE. Feel free to call for your any query related to accounting and VAT. Please send inquiry to info[at]flyingcolour[dot]com or call +971 4 4542366.