According to the UAE VAT Law, the supply of goods within the UAE mainland is subject to VAT provisions, while goods supplied within a designated zone are generally outside the scope of UAE VAT unless consumed in the designated zone. However, there is considerable confusion regarding VAT treatment for transactions between mainland companies and designated zone companies. This case study aims to clarify the concept of designated zones under the VAT Law and explain the tax treatment in various practical scenarios to enhance understanding.
Understanding Designated Zones
Before discussing VAT treatment for transactions involving designated zones, it is essential to define what a designated zone is and outline the conditions required to identify them. Only those zones that meet the criteria set by the UAE VAT Law can benefit from special VAT rules; otherwise, standard VAT rules apply as in the UAE mainland.
What is a Designated Zone?
Many free zones in the UAE offer special reliefs or benefits subject to the conditions set by the respective licensing authority. Some of these free zones are designated by the Cabinet as Designated Zones, provided they meet specific criteria. These designated zones are treated as being outside the UAE for VAT purposes, receiving special VAT treatment for the supply of goods under the UAE VAT Law.
Criteria for Designated Zones
For a free zone to qualify as a designated zone, it must meet the following conditions:
· It must be a specifically fenced area.
· It should have security controls and customs monitoring to track the movement of goods and individuals.
· It must be listed by the Cabinet as a designated zone.
· It should comply with procedures established by the Federal Tax Authority (FTA).
If these conditions are met, the free zone is considered a designated zone for UAE VAT purposes.
UAE VAT Designated Zones List
According to Cabinet Decision No. 59 of 2017 on designated zones for the purpose of Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments up to September 2021, the following are designated zones. Note: It is recommended to check the FTA website for updates or amendments to this list.
· 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 (North/South) 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 Services and Goods in Designated Zones
Services in Designated Zones
Any taxable services supplied within a designated zone are subject to VAT similarly to those in the UAE mainland. Therefore, services provided within or from the designated zone will be taxed, with the applicable rate (5%, 0%, or exempt) depending on the service category.
Goods Supplied from Designated Zones
Different scenarios dictate the VAT treatment for goods supplied from designated zones. Here are the key scenarios:
1. Supply within and between Designated Zones:
· For Consumption: Supplies intended for self-consumption within and between designated zones are subject to UAE VAT.
· For Further Supply: Supplies intended for further supply within and between designated zones are outside the scope of VAT.
