VAT on Designated Zone in UAE
A Designated Zone is an area which is specified by the cabinet decision and that meets the conditions prescribed in the UAE Executive Regulation. In other words, the Designated Zone is a VAT free Zone which is considered to be outside the State of UAE for the purpose of VAT. As a result, on any transfer of goods between Designated Zones, VAT will be not be levied
To know more about Treatment of Free Zone in VAT and what is Designated Zone and its conditions, please read VAT on Free Zone
In this article, we will discuss the treatment of supplies made 'From' or 'To' the Designated Zones. For ease of understanding, let us categorize the supplies into following scenarios.
- Supply of goods from a Designated Zone to another Designated Zone.
- Supply of goods from Designated Zones to Mainland
- Supply of goods from Mainland to Designated Zones
- Supply of goods from Designated Zone to overseas/ GCC countries
- Supply of goods from overseas/ GCC countries to Designated Zone
- Supply of services within Designated Zones
- Other exception supplies such as Water, any form of energy, self-consumption of goods in Designated Zones etc.
VAT treatment on supply of Goods related to Designated Zones
As discussed above, for the purpose of VAT, the Designated Zones are treated to be outside the State of UAE, meaning VAT will not be levied. Though it is treated as outside the State, not all supplies will enjoy this benefit, some supplies still attract VAT at 5%. The reason being, only the supply of goods will be tax-free subject to certain conditions and depending upon the place of supply, few type of supplies made from or to the Designated Zone will be taxable. The table below details the VAT applicability on supplies made from/to the Designated Zones.
|Type of Supplies||Form||To||Taxability|
|Goods||Designated Zone||Designated Zone||Non-Taxable|
|Goods||Designated Zone||Mainland*||Taxable at 5% VAT|
|Goods||Mainland*||Designated Zone||Taxable at 5% VAT|
|Goods||Designated Zone||Oversea/GCC countries||Non-Taxable|
|Goods||Oversea/GCC countries||Designated Zone||Non-Taxable|
As mentioned in the above table, any movement of goods from a Designated Zone to another will not be subject to tax only if the conditions mentioned in UAE Executive Regulations are met.
Conditions for VAT free supply of goods between Designated Zones.
Supplies between the Designated Zones will not be subject to VAT only if the following conditions are met:
- 1. The Goods are not released during transfer between the Designated Zones
- 2. Goods are not in any way used or altered during the transfer between the Designated Zones.
- 3. The transfer of goods is undertaken in accordance with the rules for customs suspension according to GCC Common Customs Law.
Over and above the conditions which are required to be met for VAT free supply of goods between the Designated Zones, the authority may request the owner of goods to provide a financial guarantee for the payment of tax, which that person may become liable, if the conditions for movement of goods are not met.
VAT treatment on Supply of Services related to Designated Zone
There is a differential treatment for supply of goods and as well as for the supply of services between Designated Zones. While the supply of goods between the Designated Zones are not subject to tax, it is not true in case of supply of services. The reason being, the place of supply of services is considered to be inside the State of UAE if the place of supply is in the Designated Zone. This implies, any services whether supplied from the mainland to Designated Zone or within the Designated Zone, the standard rate of VAT at 5% will be levied.
VAT treatment on Supply of Water or any form of energy to Designated Zone
Though the supply of water or all forms of energy are considered to be a supply of goods but in case of Designated Zone, these supplies are distinguished from other goods and treated differently. The place of supply of water or any form of energy will be considered to be inside the State if the place of supply is in a Designated Zone. This means, the supply of water and all forms of energy supplied to Designated Zone will be subject to VAT at 5% in the same way it would be in the non-Designated Zone areas of the UAE.
Self-consumption of goods supplies to Designated Zone
If the supply of goods made within a Designated Zone is to be used either by the owner or a third person, then the place of supply will be in the State of UAE. This implies that all the self-consumed goods within Designated Zones will be subject to VAT at 5%. However, there are certain exceptional scenarios where the consumption of goods within a Designated Zone will not be subject to VAT. The following are the exceptions scenarios:
- Goods are incorporated into other goods,
- Goods are attached to other goods,
- The usage of goods is such that it forms part of other goods,
- Goods are used in the production or sale of another good located in the same Designated Zone.
Goods located in Designated Zone on which VAT is not paid.
The consumption of goods located in a Designated Zone on which the owner has not paid VAT will be treated as imported into the State by the owner and will be subject to VAT if they are unaccounted. However, if these goods are consumed by the owner in the scenarios listed above (self-consumption scenarios) will not be subject to VAT.
List of Designated Zone in UAE
|Abu Dhabi||Free Trade Zone of Khalifa Port|
|Abu Dhabi Airport Free Zone|
|Khalifa Industrial Zone|
|Dubai||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|
|Sharjah||Hamriyah Free Zone|
|Sharjah Airport International Free Zone|
|Ajman||Ajman 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||Fujairah Free Zone|
|FOIZ (Fujairah Oil Industry Zone)|
It's clear that VAT treatment for supplies related to Designated Zones are different depending on the type of supplies. Firstly, the benefit of VAT exemption is available only for the supply of goods in certain scenarios and supply of services within the Designated Zone are taxable. Secondly, in order to be eligible for VAT exemption on the supply of goods within the Designated Zones, conditions, as prescribed in UAE Executive Regulations are required to be met. Thus, for businesses, it is really important to understand VAT treatment on supplies carried out by them, assess the impact of VAT on their business and accordingly plan.