Many investors and business owners choose to do business in UAE because of its tax free regime (not fully, though!). Following the release of the UAE VAT Law Framework, many businesses have been asking about VAT on free zones. This underlines the importance of the VAT framework. The UAE free zone companies want to know the treatment of existing Free Zones in the current tax regime. In other words, what will be the tax treatment on supplies to or from UAE Free Zone companies? Are Free Zone Companies tax free?
It would be helpful to understand what a Free Zone is before we discuss VAT treatment for UAE Free Zones.
What Is A Free Zone In UAE?
In the UAE, a Free Zone is a special area for the promotion of international businesses through 100 percent foreign ownership. It is advantageous for companies to operate in Free Zones since they require no UAE-resident partners or shareholders. Free zone companies in UAE are tax-free on duties and taxes such as Corporate Income Tax, Personal Income Tax, all import and export duties, etc. For UAE companies to operate a business in a Free Zone, businesses must obtain licenses and comply with the regulations of the Free Zone authorities.
Free Zones Are Not The Same As VAT Free Zones
There are many points that businesses need to take notice of, starting with the fact that ‘All Free Zones’ may not necessarily be a ‘VAT Free Zone.’ The UAE VAT Law and Executive Regulations clearly outline these definitions and provisions. These Designated Zones have to comply with Cabinet Decision No. 59 of 2017 on Designated Zones for the purposes of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT). The executive regulation defines the conditions under which a VAT Free Zone needs to operate. VAT Free Zones in the UAE are known as ‘Designated Zones’.
VAT Designated Zone
The Executive Regulation defines a designated zone as a specific area that meets the conditions specified by a cabinet decision. The 5% VAT will not apply to supplies made between Designated Zones for VAT purposes. In addition, a Designated Zone serves as an outside state for VAT purposes. To qualify, you must meet the following conditions:
- There should be a fence around the geographical area
- It should have security measures, and customs controls in place to monitor the entry and exit of individuals and the movement of goods to and from the area
- It should have internal procedures regarding the method of keeping, storing, and processing Goods within the Designated Zone
- The operator of the Designated Zone should comply with the procedures set by the Authority
According to Article 51 of Cabinet Decision no 52 of 2017, in the case where the Designated Zone changes how it operates or does not meet any of the conditions that were imposed upon it before its designation as a Designated Zone pursuant to the Cabinet Decision, the zone shall be treated as if it were part of the State.
Designated Zone’s VAT Obligations
Business establishments within a Designated Zone qualify as onshore for VAT purposes since the premises are inside the UAE. They are subject to the same obligations and rights concerning VAT compliance as businesses not located in a Designated Zone. Under the general VAT regulations, they may have to register, account for, file, and pay VAT (or decide to do so voluntarily).
In the UAE, businesses can also form VAT groups with other businesses if they fulfill certain requirements. Additionally, input VAT recovery on their taxable expenses is subject to the normal UAE rules.
Guidelines For Designated Zones
A complex set of VAT rules applies to transactions within Designated Zones. If a business is operating within Designated Zones or transacting with a business that is operating within Designated Zones, it is imperative that it fully understands the rules.
Supply of services
An area of a Designated Zone serving as a place of supply of a service acts as if it were an area of the mainland (i.e., the UAE) that supplies the service. They will be subject to regular VAT rules, essentially.
Supply of goods within a Designated Zone
When two parties are located in a Designated Zone and both the supplier and consumer are within that zone, then the supply of goods will generally be out of the scope of VAT.
Transfers of goods into a Designated Zone
Transfers of goods into a Designated Zone are subject to the following general rules:
- A supply moving from outside the UAE into a Designated Zone is not subject to UAE VAT. This is because the supply appears to be moving from outside the UAE to outside the UAE.
- A movement or supply from the mainland UAE into a Designated Zone falls under similar tax rules as intra-UAE movements. It does not qualify as an export.
- A transfer of goods between Designated Zones is not subject to UAE VAT. In compliance with the GCC Common Customs Law, goods transferred between Designated Zones cannot be released into circulation, used, or modified during the transfer.
Import of goods from Designated Zones
The supply of goods into the UAE from a Designated Zone is known as Imports. Import taxes apply to such supplies.
List of VAT Designated Zones
According to Cabinet decision No. 59, the following free zones are designated zones within the UAE for purposes of the Federal Decree-Law No. 8 of 2017 on Value Added Tax.
This blog provides clarity and practical guidance about the fact that all Free Zone Companies are not exempt from taxes. Business owners are recommended to consult expert VAT consultants regarding their tax situation owing to the complexity of the VAT rules around transactions in Designated Zones.