VAT Treatment In Free Zones Of UAE – All You Need To Know
VAT was introduced in the UAE on January 1st, 2019. This tax applies to all the supplies of goods and services taking place in the territorial boundaries of the UAE. To facilitate foreign businesses, the government has created certain free zones across the Emirates that are subject to different VAT regulations.
Since the implementation of VAT in UAE, free zones have created a lot of buzz in the business community. Therefore, every business owner wants to know about VAT treatment on the supply of goods and services in the free zones. So, if you are operating in one of the free zones of the UAE and are curious about VAT treatment in these zones, then continue reading.
Everything You Need to Know About Treatment of VAT in Free Zones in UAE
Here is everything you need to know about the treatment of VAT in the free zones in the UAE and rules regulations regarding doing business in such zones. Before moving forward, let us understand what free zones are.
What Are Free Zones?
Free zones, or otherwise known as Free Trade Zones, are areas in the UAE that are developed to promote international business. In these areas, foreign companies can have 100% ownership of their businesses. Free zones are attractive business locations because foreigners don’t need a UAE national as a local partner or shareholder.
You need to understand that all free zones are not regarded as “VAT Free Zones.” Free zones that are considered as VAT free are called Designated Zones. Each emirate in the UAE has designated zones. It is quite confusing for most business owners, so make sure to contact the VAT consultancy services company in the UAE to get a better understanding of VAT treatment for your business.
What is a Designated Zone in UAE?
In UAE, designated zones are areas that are treated as being outside the UAE, and any supplies between designated zones will be outside the scope of VAT.
For example, A Traders located in the Hamriyah Free Zone supply goods to B traders in Dubai Airport Free Zone. As both are considered to be designated zones, thus, the supply of goods from one zone to another will be VAT free.
Designated Zone vs. Free Zone
All designated zones are considered free zones, but all free zones are not designated zones. Confusing, isn’t it. Here is a list of some free zones that are considered designated zones by the UAE Cabinet Decision no. 59.
Out of the total 45 free zones, these are some of the VAT designated zones in UAE. If you are operating in a free zone that is not a designated zone, you have to follow VAT regulations that are applicable to the mainland UAE. if you are still confused, consider contacting the VAT consultancy services company in Dubai.
According to the UAE authorities, a free zone must fulfill the following conditions to be called a designated zone:
- It is a geographic zone that is fenced
- It has independent internal procedures with respect to the processing and storing of goods.
- It has security and customs controls in place that monitor the movement of goods and individuals.
- The operator of the designated zone must comply with procedures set by the UAE authority.
VAT in Designated Zones
According to the Federal Tax Authority (FTA), the designated zones are treated outside the VAT regulations and laws. But there are some deviations. When it comes to VAT, your company’s status will either be one of the followings:
- Taxable: pay VAT at 5%
- Zero-rated: You have to account for a 0% VAT rate
- Out of scope: You don’t have to account for VAT at all.
According to the FTA, companies operating in the designated zones of the UAE are outside of the scope of VAT. Hence, goods traded between designated zones don’t account for VAT. However, there is a consumption factor.
In simple words, if goods are sold within a designated zone and are consumed within that zone, then the seller will have to charge VAT on such goods. But if these goods will be used to produce another good in the designated zone, then there is no VAT implemented on such goods that are not itself consumed.
So, there are major points that we get from this:
- Goods traded between designated zones don’t have VAT if they are not consumed in that zone.
- If goods are sold within a designated zone and consumed there, then VAT will be charged.
VAT and Mainland Companies
Businesses in the UAE are often confused about the VAT implications of buying and selling goods from designated zones to mainland companies. Here is what you need to know:
- If your company (situated in a designated zone) is buying goods from a mainland company, you will be charged VAT at a standard rate of 5% on goods.
- If you are selling goods to a company on the mainland, it will be treated as an export, and you don’t have to pay any VAT. However, the importer of your goods on the mainland will have to pay both VAT and customs duties.
VAT and Foreign Trade
VAT consultancy services Dubai based companies are often asked what are the VAT implications of buying and selling goods from designated zones to companies that are outside UAE are?
Although VAT will be implemented on the movement of goods from the mainland to a designated zone, buying goods from a foreign company (outside UAE) to designated zone does not come under the scope of VAT. Similarly, goods exported outside the UAE from the designated zone are out of the scope of VAT.
But, if imported goods are consumed within the designated zones, they will become taxable and will abide by tax regulations on imports.
How to Determine If You Should register for VAT?
Confusing, isn’t it! After reading all the information about VAT in free zones and designated zones, you must be thinking if your company should register for VAT? To know that you need to list all sales and purchases made by your company over the past 12 months. After that, remove all the exempt supplies that leave you with sales of zero-rated and standard-rated supplies.
Compare your taxable turnover rate with the VAT threshold and see if you qualify for registration. However, it is best to hire VAT consultancy services in Dubai to avoid administrative penalties. One of the most common concerns of business owners in the UAE is if the VAT regulations apply to their company or not. To determine that you need to analyze your business and check if you have crossed the registration threshold.
If you have, then go ahead and register your business for VAT and ensure compliance within your company.