Designated zones in the UAE, often referred to as free zones, offer unique VAT treatment, making them attractive for investors due to tax benefits and operational leniencies. With around 30 free zones in the UAE, approximately 20 are classified as designated zones under the VAT regime. Understanding how VAT is applied in these zones, especially for services, is crucial for businesses operating within them.
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
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
How Unicorn Global Solutions Can Assist
Navigating VAT implementation and compliance in designated zones can be complex. Unicorn Global Solutions offers expert VAT services in Dubai, including VAT return filing, ensuring VAT compliance, and providing accounting and auditing services. Our tailored solutions help businesses manage VAT obligations efficiently.
Unicorn Global Solutions is known for delivering robust, customized services to meet the specific needs of clients. Contact us to learn more about how we can assist with VAT and other financial services to help your business thrive in the UAE. Text us on whatsApp or call us today
