Impact of VAT on UAE Free Zone Companies in 2020
Free Zone is a trade Zone, designed to market the international business in UAE by providing 100% foreign enterprise ownership. Free Zones offer attractive incentives like no requirement for a UAE national as an area partner/shareholder, tax exemptions on duties and taxes like Corporate, income Tax, all import and export duties etc. Understanding the treatment of VAT on UAE Free Zones, the companies in free ports are required to get the required licenses from the respective Free Zone authorities and suit their guidelines when operating the business in this region. However, 1st October 2017, UAE has introduced excise, applicable on a couple of industry segments and 1st January 2018, it's introduced VAT applicable to most industry segments and on all types of supply of products and services in UAE. The UAE features a number of free zones across the Emirates - Dubai, Abu Dhabi, Sharjah, Fujairah, Ajman, Ras-Al-Khaimah and Umm-Al-Quwain.
- 100% foreign ownership
- 100% import and export tax exemptions
- 100% repatriation of capital and profits
- Exemption from corporate /personal tax
For example, Stone Traders located in Jebel Ali Free Zone supplied goods to Siemen Traders, Dubai Airport Free Zone within the above illustration, Jebel Ali Free Zone and Dubai Airport Free Zone are assumed to be Designated Zones. The availability of products from Stone Traders to Siemen Traders are going to be VAT free since the availability is between Designated Zones.
Each Free Zone is run and governed by its own regulatory authorities with their own rules and regulations. The licensing authority within each Free Zone is liable for issuing Free Zone licenses. Most of the free zones offer three main sorts:
- Freeport establishment (i.e. Single shareholder company)
- Freeport company (i.e. A corporation with two or more shareholders)
- Branch of a far-off company (similar to onshore branches, but there's no got to appoint a service agent)
VAT Implications on Free zones
1. The transfer of goods between Designated Zones shall not be subject to Tax: Where the goods, not in any way used or altered during the transfer between the Designated Zones, or Where the transfer is undertaken in accordance with the rules for customs suspension according to GCC
2. Transfer of goods between two Designated Zones will be treated as outside the scope of VAT subject
3. Import of goods in Designated Zone will be treated as outside the scope of VAT since the place of supply for goods generally follows the location of the goods
4. When a Designated Zone company sells goods to the mainland entity in UAE, should the Designated Zone company charge VAT or will be considered as "Out-Of-Scope" transaction from VAT:
Scenario 1: Goods are imported by Mainland Company: In this case, considering Designated Zone company sold goods within Designated Zone, will be considered as Out-Of-Scope Transaction for Designated Zone Company. Considering Mainland Company took possession of goods in Designated Zone, and imported goods will be treated as subject to tax under Reverse Charge Mechanism (RCM).
Scenario 2: Goods are imported by Designated Zone Company: In this case, considering Designated Zone Company imported goods will be treated as importing goods in UAE & will be subject to tax under Reverse Charge Mechanism (RCM). Considering Mainland Company they will record this transaction as a purchase of goods within UAE (Input tax claim)
5. When a mainland company sells goods to a Designated Zone Company: Goods from a place in the UAE to a Designated Zone shall not be considered an export of those goods. Designated Zone company will record this transaction as a purchase of goods within (Input tax claim)
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