The companies operating within the Free Zone areas are required to get registered for VAT in the UAE just like the companies operating outside the Free Zones. However, the companies operating in a Free Zone that has been classified as a designated zone by the government of UAE will be subject to slightly different VAT rules and regulations when compared with the companies operating outside the designated zones.
As per Executive regulations of the UAE VAT law, Designated Zone is a specific fenced geographical area that has security measures and custom controls of its own to monitor any good/ person entering or leaving the area. The designated area should also have internal procedures in place in relation to keeping, storing and processing goods within the designated area.
For VAT purposes, a Designated Zone is considered to be outside the UAE and as a result of it the VAT rules and regulations applicable to companies operating within a Designated Zone are slightly different from companies operating in the mainland UAE and Free Zone areas.
Goods Supplied to/ from a Designated Zone
All the goods supplied to a Designated Zone from another Designated Zone are considered to be outside the scope of VAT and therefore are classified as Non-Taxable, only if certain conditions are met. The conditions specified in the UAE tax law are as follows:
• The goods are not released, used or altered during the process of being transferring from one Designated Zone to another
• The process of transferring goods is undertaken as per the rules for customs suspension that are in accordance with GCC Common Customs Law.
VAT will be charged at the standard rate of 5% on both the goods supplied from the mainland UAE to a Designated Zone or goods supplied from a Designated Zone to the mainland UAE.
Supply of goods from a GCC/ overseas country to a Designated Zone as well as supply of goods from a Designated Zone to a GCC/ Overseas country are considered to be outside the scope of UAE VAT laws and therefore are classified to be Non-Taxable.
Service provided within the Designated Zone
The Executive Regulation of the tax law specifies that place of supply in case of services provided within the domain of a Designated Zone will considered to be the mainland UAE. This change in rule for the supply of services ensures the treatment of VAT by companies operating in a Designated Zone to be similar to the treatment of VAT adopted by the companies operating within the mainland UAE.
Supply of water or any form of energy to a Designated Zone
The VAT treatment for supply of water or other forms of energy to Designated Zones is different compared to the treatment of VAT for goods supplied to Designated Zones. The place of supply for water or any form of energy provided to the designated Zones is considered to be the mainland UAE. This means, the above mentioned supplies will be subject to 5% VAT, even if provided to a Designated Zone outside the mainland UAE.