How is VAT implemented on services received in designated zones in UAE?
Designated zones can be referred to as the free zones which are not included in the VAT regime in UAE. These are special territories that have VAT rules which are more lenient as compared to other places. There are almost 30 free zones within the UAE that attract investors by providing them with tax benefits, and other relaxations in the working of their businesses. After the introduction of VAT in UAE, almost 20 of the free zones are considered designated zones.
One important thing that investors must keep in mind is that VAT applicability differs between designated free zones and non-designated free zones. Another point of importance is that the VAT applicability on services is different from the applicability on goods. The case of goods purchased within the designated zone and outside the state is considered outside the scope of the VAT.
Criteria to be fulfilled to become a designated zone in UAE
The following conditions must be fulfilled to become an identified designated zone in UAE:
- It must be a fenced geographical area.
- It must have stringent security measures along with control procedures to monitor the movement, entry, and exit of goods and services.
- It must have strict internal procedures for enhancing the method of keeping, storing, and processing the goods in the area.
- The VAT procedures laid down by the FTA must be complied with by the operator.
What is the application of VAT on services in a designated zone?
The main point to remember before understanding the application of VAT services in Dubai designated zones is that these zones are considered within the UAE territory for rendering and receiving services. Hence, the VAT is implemented as per the general provisions of UAE VAT law and executive regulations laid down by the FTA.
You can also read: Some top VAT tips for entrepreneurs in UAE to avoid hefty penalties
Now let's understand the VAT application in designated zones, which can be categorized in different situations:
When services are received from another designated zone,
In the event that a service is rendered from one designated zone to another, in such a situation, the VAT will be charged on the service at 5%. The standard rate of VAT is charged because the place of supply for a service is considered within the state when it is rendered within the designated zone.
Example: Service provided by EFG firm in Dubai Cars and Automotive zone to JKL firm in Dubai Aviation City will be charged VAT at 5% as these are services provided between two designated zones
When services are received in the designated zone, they are rendered by UAE Mainland
The VAT will be charged as per the normal VAT regulation when the service is received from the UAE mainland, i.e., the normal rate of 5% VAT will be charged. As the UAE mainland is also considered within the state, many standard rates will be applied to the services provided.
Example: IT services provided by a company DEF in Dubai Mainland to a JKL company in Jebel Ali Free Zone will be charged VAT at 5% as the transfer of services is between the designated zone and the mainland.
When services are received from outside the UAE state,
As a part of any business requirement, the firms in the designated zone may receive services from outside the UAE. In such circumstances, the services will be taxable based on a reverse charge mechanism, i.e., the recipient of such services will be liable to pay the tax when they file their VAT returns with the authority.
You can Also Read: VAT Guide Specifying Major Obligations for Car Dealers and Service Centres
Example: QPR firm in Jebel Ali free zone availed advertising services from IJK firm in the USA. In such a situation, the services received by the QPR firm will attract tax on a reverse charge mechanism at a 5% VAT rate. Hence, the recipient, the QPR firm, will have to pay the tax.
How can CDA assist you in the implementation of VAT and filing returns?
The firm that is situated in UAE and transacts business between different firms located in different zones will require expert assistance from a tax consultant regarding the implementation of VAT on different goods and services. CDA, with its expertized team, provides VAT services in dubai along with other vital services like VAT return filing, ensuring VAT compliance, and accounting and auditing services. CDA is known for its robust and custom-tailored services provided to its clients. To know more about the various services, feel free to contact CDA.