VAT Treatment for Designated Zones In the U.A.E!

As per the Executive Regulations of FTA, certain Free Zones are listed by the Cabinet Decision which qualifies for special VAT treatment, they are known as Designated Zones. The Designated Zones are treated as being outside of the territory of the UAE for specific supplies of goods.?

Further, for an area located within one of the?Designated Zones ?to qualify as being outside the UAE (for VAT purposes), it must also meet the following conditions;

1. The Designated Zone must be a fenced geographic area.
2. The Designated Zone must have security measures and customs controls in place to monitor the entry and entry of individuals and the movement of goods to and from the Designated Zone.
3. The Designated Zone must have internal procedures regarding the method of keeping, storing, and processing goods within the Designated Zone.
4. The operator of the Designated Zone must comply with the procedures set out by FTA.

Hence only where a Designated Zone that meets all the above conditions can be treated as outside the UAE for VAT purposes.?

Supply of Services

The supply of services related to Designated Zones will not qualify for this special treatment and are subject to normal UAE VAT rules.

The Executive Regulation specifies that the place of supply of services is considered to be within the UAE if the place of supply is within the Designated Zone.?This indicates, any services whether supplied from the mainland to Designated Zone or within the Designated Zone, the standard rate of VAT at 5% will be imposed.

Supply of goods and consumption within a Designated Zone

The supply of goods within a Designated Zone should be considered as outside the scope of VAT. The general rule is overridden where the supply of goods is made within a Designated Zone for “consumption”. In this case the supply will be considered as made within the UAE VAT territory and subject to the UAE VAT Law provisions. The term "consumed" should be interpreted broadly to include any utilization, application, employment, deployment or exploitation of the goods.

Transfers of goods into Designated Zones

• Any supply of goods into a DZ from outside the UAE would be treated as taking place outside the UAE VAT territory.
• Any supply of goods from ‘mainland’ UAE into a DZ is not considered to be an export of goods for VAT. Therefore, such supplies are treated as local supplies and subject to UAE VAT where applicable.
• A transfer of goods between two Designated Zones will be treated as outside the scope of VAT subject to the fulfillment of 2 conditions: a) the goods, either in part or in their entirety, are not released into circulation, nor used or altered in any way during the transfer; and b) the transfer is undertaken in accordance with the rules for customs suspension per the GCC Common Customs Law.

Import of goods from Designated Zones

The movement of goods from a Designated Zone into UAE ‘mainland’ is treated as an import of goods into the UAE for VAT purposes and import VAT becomes due by the importer of goods in the record (unless the goods are moved under a customs duty suspension arrangement).

A double taxation will arise where a good was subject to VAT while acquired for “consumption” within a Designated Zone before being imported into the ‘mainland’ and subject to import VAT. In this case, the VAT paid at import will always be fully recoverable, irrespective of the importer’s usual input VAT recovery entitlement.

In order to fully recover the VAT upon import, the importer will be required to retain evidence that VAT was incurred twice; in respect of the purchase in the Designated Zone and in respect of the import. The importer must also be able to substantiate that there were no intervening transactions between the purchase of the good and its actual import.

A qualified VAT consultant can guide you to register and navigate through suitable Tax benefits and exemptions. To know more about Designated Zones contact us .

By Mohammed Risham

Tax Consultant