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Criteria to Become a Designated Zone in UAE
For a free zone free zone to be recognized as a designated zone, it must meet specific criteria:
It must be a fenced geographical area.
It must have stringent security measures and control procedures to monitor the movement, entry, and exit of goods and services.
It must implement strict internal procedures for storing, processing, and handling goods.
The VAT procedures established by the Federal Tax Authority (FTA) must be adhered to by the operator.
VAT Application on Services in Designated Zones
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Designated zones are considered part of the UAE territory for VAT purposes when it comes to rendering and receiving services. Consequently, VAT is applied according to the general provisions of the UAE VAT law and executive regulations.
Situation 1: Services Received from Another Designated Zone
When a service is rendered from one designated zone to another, the VAT is charged at the standard rate of 5%. This is because the place of supply for the service is considered within the state.
Example: If EFG firm in Dubai Cars and Automotive Zone provides a service to JKL firm in Dubai Aviation City, VAT is charged at 5%.
Situation 2: Services Received in a Designated Zone from UAE Mainland
When services are received from the UAE mainland, the normal VAT rate of 5% is applied. The mainland is considered within the state, so the standard rate is applicable.
Example: IT services provided by DEF in Dubai Mainland to JKL in Jebel Ali Free Zone are charged VAT at 5%.
Situation 3: Services Received from Outside the UAE
For services received from outside the UAE, the reverse charge mechanism applies. The recipient of the service in the designated zone is liable to pay VAT when filing their VAT returns.
Example: If QPR firm in Jebel Ali Free Zone receives advertising services from IJK firm in the USA, VAT at 5% is applied on a reverse charge basis, making QPR responsible for the tax
