VAT on Goods Supplied from Designated Zone in UAE
Once you incorporate a legal business entity in a Designated Zone of UAE, which is a qualified Free Zone, there falls a responsibility to apply correct VAT practices. There are so many misconceptions over the applicability of VAT and tax treatments on the context of business transactions within a Designated Zone. The computation of VAT on Designated Zone requires a different mechanism. It is always recommended to seek expert opinion before settling on the tax treatments to ensure everything is processed in compliance with the VAT regulation. In this article, we discuss various aspects of goods supplied within a Designated Zone on the perspective of UAE VAT rules.
How to identify goods supplied within a Designated Zone?
Identification of goods supplied within a Designated Zone will follow the rules of ‘place of supply’ which is basically determined based on the location of goods. Examples of goods supplied within a Designated Zone can be as below:
- Selling of food items by a restaurant to walk in customers in a Designated Zone
- Selling of stationery items by a stationery shop to walk in customers in a Designated Zone
- Selling of goods by a furniture shop to a company, where both the shop and the company are in the same Designated Zone
- Selling of goods by a trading company to a manufacturing company and both the companies are in the same Designated Zone
Is there any default rule for VAT treatment on goods supplied within a Designated Zone?
Designated Zone is considered as outside of UAE for VAT purposes if the specific conditions listed in the regulation are met by those Zones. And thereby any supply of goods within a Designated Zone is by default seen as same as a transaction happening outside UAE and treated as out of the scope of VAT in UAE. It is extremely important that the companies in any Free Zones to ensure whether those Zones qualify to be a Designated Zone or not as per the VAT rules, before concluding on the applicability of VAT and impact of tax treatments.
When is the override of default rule apply on goods supplied within a Designated Zone?
An override of default rule can happen based on the intended use of the goods supplied within a Designated Zone. If the goods supplied within the Zone is consumed by the customer, then the transaction is within the scope of UAE VAT and the standard tax rate shall apply. For example, a stationery shop is selling stationery items to a consulting company in the same Designated Zone. The supplied stationery items are consumed by the recipient company and hence the transaction is within the scope of UAE VAT and the stationery shop shall charge VAT at the standard rate.
Is there any exemption for applying the override of default rule on consumed goods in a Designated Zone?
Following two scenarios have been specifically listed down in the VAT regulation as not to be considered as consumption by the recipient of the goods and hence such transactions to be categorised as outside the scope of UAE VAT.
- The supplied goods are included as part of another good in the same Designated Zone by the customer and this another good is not consumed
- The supplied goods are used in manufacturing another good in the same Designated Zone by the customer and this other good is not consumed, provided there is a direct connection between the initial goods supplied and the one being produced.
Who is responsible for the identification of the intended use of the supplied goods in a Designated Zone?
The VAT regulation has exclusively mentioned that the responsibility for the identification of such intended use of supplied goods in a Designated Zone is always on the supplier. The supplier has to understand the intended use by its customers of the goods supplied and apply correct VAT treatment accordingly. Hence the supplier has to identify whether the transaction is within the scope of UAE VAT or not.
Also read, How VAT will Affect the Operations of Designated Zone Companies in UAE?
In the cases where the intended use is not clear from the context of the transaction, the supplier can always ask for a written statement from the customer as supporting evidence for the tax treatment applied.
How CDA can help you with your business in a Designated Zone?
CDA has a team of experienced financial professionals, who can assist you in various areas such as:
- To clarify your queries on the incorporation of the company and tax registration requirements
- To guide you to apply the correct VAT treatments and to help you interpret the tax impacts
- On a case to case basis analyzing your business transactions
- To support you with our accounting services and ensure the implementation of correct tax mappings
- To ease your regulatory and management reporting processes and institute adequate internal controls in your company
- To provide expert advice on various compliance matters and share our industry-specific knowledge
Hope you have got a clear idea of the different aspects of VAT on goods supplied from Designated Zone in UAE. If you still have any doubts, feel good to contact CDA. Our expert will call you back immediately and will offer you a one-hour free consultation.