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UAE VAT Law | How VAT is Applicable to UAE Designated Zones

The UAE has established itself as a business hub with numerous free zones, particularly in Dubai. These free zones are divided into customs-controlled zones, where entry, exit, and movement of goods are strictly monitored, and non-customs-controlled zones. Under the UAE VAT Law, free zones are further categorized into designated zones and non-designated zones, with specific tax provisions applicable to each. This article delves into the nuances of VAT applicability in designated zones, guided by Article 51 of the VAT Executive Regulations.

What Are Designated Zones?

Designated zones are specific areas in the UAE that are treated as being outside the UAE for VAT purposes. However, they are not entirely exempt from VAT regulations. Transactions involving these zones are subject to special provisions that differentiate them from other free zones and mainland UAE.

VAT Rules for Transactions in Designated Zones

1. Importing Goods into Designated Zones

When goods are imported into a designated zone from outside the UAE, the transaction is considered out of scope for VAT. This means no VAT is applicable on such imports.

2. Purchasing Goods from the Mainland

If a designated zone purchases goods from the UAE mainland:

  • A 5% VAT is charged by the supplier.
  • The designated zone buyer can claim input VAT credit, provided the purchase meets eligibility criteria.

3. Transactions Within Designated Zones

  • Between Companies in the Same Designated Zone: No VAT is applicable unless the goods are intended for personal consumption.
  • Between Different Designated Zones: Similarly, no VAT is charged unless the goods are used for consumption.

Sales from Designated Zones

1. Selling Goods Outside the UAE

When a company in a designated zone sells goods to entities outside the UAE, the transaction is deemed out of scope for VAT. Even if the sale is made to an individual abroad, no tax liability arises.

2. Selling Goods to the Mainland

Sales from a designated zone to the mainland are subject to 5% VAT, which must be collected and remitted to the Federal Tax Authority (FTA).

3. Selling Goods Within Designated Zones

  • To Companies: No VAT applies unless the goods are used for consumption.
  • To Individuals for Consumption: A 5% VAT must be collected and paid to the FTA.

4. Selling Goods Between Designated Zones

Similar to intra-zone transactions, sales between designated zones are VAT-exempt unless the goods are for consumption, in which case VAT applies.

Taxation of Services in Designated Zones

Unlike goods, services provided within a designated zone are treated on par with transactions in the mainland. A 5% VAT is applicable on all services, regardless of whether they are consumed within the designated zone or not.

Key Scenarios Explained

1. Import from Outside the UAE

  • Tax Implication: Out of scope for VAT.
  • Example: A company in a designated zone imports raw materials from the US. No VAT is charged.

2. Purchase from the Mainland

  • Tax Implication: 5% VAT applies.
  • Example: A company in a designated zone buys office equipment from a mainland supplier. VAT is charged but can be claimed as input credit.

3. Sale Within the Designated Zone

  • Tax Implication: No VAT unless for consumption.
  • Example: A designated zone warehouse sells goods to another company in the same zone for resale. No VAT applies.

4. Sale to the Mainland

  • Tax Implication: 5% VAT applies.
  • Example: A designated zone-based manufacturer sells products to a retail store in Dubai. VAT must be charged.

5. Sale to Other Designated Zones

  • Tax Implication: No VAT unless for consumption.
  • Example: A company in a Dubai designated zone sells goods to a company in an Abu Dhabi designated zone for export. No VAT applies.

6. Sale to International Buyers

  • Tax Implication: Out of scope for VAT.
  • Example: A designated zone exporter ships goods to Europe. No VAT is charged.

Special Considerations for Designated Zones

  1. Consumption Within Designated Zones: If goods are consumed within a designated zone, VAT is applicable, even if the transaction is between two companies within the zone.

  2. Input VAT Recovery: Companies in designated zones can recover VAT on eligible purchases made from the mainland.

  3. Customs and Logistics: Designated zones often have strict controls, requiring businesses to maintain accurate records of goods' movement to ensure compliance with VAT regulations.

Conclusion

Designated zones in the UAE play a pivotal role in simplifying international trade and fostering economic growth. However, businesses operating in these zones must navigate the complex VAT rules to remain compliant. Understanding the distinctions between transactions involving the mainland, other designated zones, and international buyers is crucial.

By adhering to the provisions outlined in Article 51 of the VAT Executive Regulations, businesses can optimize their tax obligations while leveraging the advantages of operating within a designated zone. Whether dealing with goods or services, the key lies in meticulous record-keeping and a clear grasp of VAT applicability in various scenarios.

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