VAT on Designated Zone in UAE

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.

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:

• The Goods are not released during transfer between the Designated Zones
• Goods are not in any way used or altered during the transfer between the Designated Zones
• 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 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

Conclusion

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.

Read more about UAE VAT

UAE VAT Return, VAT in UAE, How Does VAT System Works, Frequently Used Terms in VAT, VAT Exempt Supplies in UAE, VAT Return Form 201, VAT Return Filing in UAE, VAT Return Filing Period in UAE, VAT Treatment on Purchase of Goods into Designated Zone in UAE, VAT Computation in Case of Services Supplied from Designated Zone in UAE, VAT Computation on Goods Supplied from Designated Zone in UAE, New VAT Free Zones in UAE VAT, VAT Applicability, Value of Supply for Import of Goods, Import of goods in VAT Return Form 201

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FAQs on VAT

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