How VAT will Affect the Operations of Designated Zone Companies in UAE?
Planning to open an import/export business in the UAE? Designated Zones let you save in several areas including taxes. The Designated Zone is a VAT-free zone which is supposed to be outside the State of UAE for the scope of VAT. Hence, VAT will not be levied on any transfer of goods between Designated Zones. This article will give you a clear picture of the impact of VAT on UAE Designation Zone companies.
What are Designated Zones in UAE? How is it different from Free Zones?
Designated Zones are qualified Free Zones which meet the specific criteria listed down in VAT rules. Unless a Free Zone is qualified to be a Designated Zone, it will be treated as the same as included in the territorial area of UAE and the VAT treatments will be the same as any other place in UAE. So if you are a registered entity in a Free Zone, to avail the specific VAT exemptions, you need to ensure the Free Zone is categorized as a Designated Zone. It is understood that companies are careful of applying VAT on UAE Free Zones. Apparently few transactions related to Designated Zones are out of the scope of UAE VAT when specified rules are met.
<h3>How to identify Designated Zones (qualified free zones)?</h3>
Latest list of Designated Zones as specified by a cabinet decision can be found in FTA site: https://www.tax.gov.ae/en/legislation
Apart from being included in the above list of Designated Zones by a cabinet decision, Free Zones shall meet all the following conditions to avail the status of “outside UAE” for VAT purpose:
- It should have a fenced physical space
- It should have security and control measures to monitor the movements to and from the Zone for goods and individuals
- It should have internal controls with respect to the handling of goods
- Whoever is operating the Zone shall comply with the requirements of FTA
Is VAT registration mandatory for Free Zone entities?
VAT registration rules for businesses in Free Zones are the same as any other entity. If the number of taxable supplies in UAE exceeds or is expected to exceed the mandatory threshold limit of AED 375,000, the entities should apply for VAT registration and arrange for the recording and reporting of VAT on a periodic basis. The authority has kept the option of voluntary registration by the entities if the number of taxable supplies in UAE exceeds or is expected to exceed the threshold limit of AED 187,500. It is to be noted that the entities in Free Zones shall monitor regularly whether their status of qualified Designated Zones is still valid and in which all cases they can avail the specific out of scope VAT treatments to conclude on the registration requirements.
What is the VAT treatment for the supply of services?
Supply of services in connection with a Designated Zone are always within the scope of UAE VAT.
Example 1: Company ‘A’, an insurance broker avails internal audit services from a consultancy firm ‘B’ and both ‘A’ and ‘B’ are in a qualified UAE Designated Zone. This transaction is within the scope of UAE VAT and taxable at a standard rate.
Example 2: Company ‘X’ which is in a qualified UAE Designated Zone provides consultancy service to a company ‘Y in London. This transaction is within the scope of UAE VAT and taxable at zero rates.
What is the VAT treatment for the supply of goods within a Designated Zone?
VAT treatments in these cases will depend upon the end usage of the supplied goods within a Designated Zone. If the supplied goods in a Designated Zone is intended for consumption within the Zone, the same shall be treated as within the scope of VAT in UAE. In all other cases, where the supply of goods is within a Designated Zone, the place of supply by default is considered as outside UAE and those supply transactions will be outside the scope of UAE VAT.
Example 1: Company ‘A’, an insurance broker purchases stationery items for administrative purposes from a stationery shop ‘B’ and both ‘A’ and ‘B’ are in a qualified UAE Designated Zone. This purchase is within the scope of UAE VAT and taxable at a standard rate.
Example 2: Company ‘X’, a trading company purchases furniture from a company ‘Y and both ‘X’ and ‘Y’ are in a qualified UAE Designated Zone. ‘X’ purchased the furniture for resale within the Designated Zone. This purchase is outside the scope of UAE VAT and not taxable.
What is the VAT treatment for transfer of goods into a Designated Zone?
VAT treatments in these cases will differ based on the origin of goods in the transfer as below:
- Supply of goods from outside UAE to a Designated Zone is outside the scope of VAT and not taxable
- Supply of goods from the mainland of UAE to a Designated Zone is within the scope of VAT and is taxable at the standard rate
- Supply of goods from one Designated Zone to another such Zone is outside the scope of VAT, provided the specific requirements as per FTA and customs are met
What is the VAT treatment for transfer of goods from a Designated Zone?
When the supply of goods is made from a Designated Zone to the mainland of UAE, the transaction is considered as an import of goods to UAE and the VAT on import shall be paid by the importer.
Though specific tax rules are listed above for general cases relating to transactions relating to a qualified Free Zone, it is always suggested to get an expert opinion before concluding on the assessment of VAT treatments to ensure compliance with the applicable rules and regulations.
CDA VAT services for Designated Zone companies in UAE
CDA has been providing accounting, audit, compliance and tax-related consultancy services to various business entities in Free Zones. From the registration of the company to the routine support for the finance function, we extend our range of services to you as your trusted consultants.
We are endowed with specific industry and regional experience gained by serving clientele in the diverse spectrum. For your queries on tax treatments with respect to transactions in Free Zones or Designated Zones, we have experienced and qualified professionals who can guide you and clarify your concerns.
Hope you got a clear idea of how VAT affects the operations of Designated Zone companies in UAE. Still, need expert tax and accounting advice for your business in Designated Zones? CDA can help you in many tax and accounting related areas. Feel free to contact us to have a one-hour free consultation with us, where we can provide you with our insightful thoughts on various financial matters.