Designated zones in the UAE are special free zones that enjoy more lenient VAT rules compared to other areas. These zones are designed to attract investors with tax benefits and operational relaxations. Of the nearly 30 free zones in the UAE, around 20 are considered designated zones under the VAT regime.
It’s important for investors to note that VAT applicability differs between designated and non-designated free zones. Additionally, the VAT rules for services differ from those for goods. Goods purchased within a designated zone and outside the state are generally outside the scope of VAT.
Criteria for Becoming a Designated Zone in UAE
To qualify as a designated zone in the UAE, the following conditions must be met:
- Fenced Geographical Area: The zone must be a clearly defined and fenced area.
- Security Measures: It must have stringent security measures and control procedures to monitor the movement, entry, and exit of goods and services.
- Internal Procedures: The zone must implement strict internal procedures for managing, storing, and processing goods.
- FTA Compliance: The zone’s operator must comply with VAT procedures laid out by the Federal Tax Authority (FTA).
Application of VAT on Services in Designated Zones
Designated zones are considered part of the UAE for the purpose of rendering and receiving services. Therefore, VAT is implemented according to the general provisions of UAE VAT law and the executive regulations issued by the FTA.
Situation 1: Services Received from Another Designated Zone
When a service is rendered from one designated zone to another, VAT is charged at the standard rate of 5%. This is because the place of supply is considered within the UAE state.
Example: If EFG firm in Dubai Cars and Automotive zone provides services to JKL firm in Dubai Aviation City, VAT is charged at 5%.
Situation 2: Services Received from UAE Mainland
When a service is received from the UAE mainland, VAT is charged at the normal rate of 5%. The UAE mainland is considered within the state, so the standard VAT rate applies.
Example: If DEF company in Dubai Mainland provides IT services to JKL company in Jebel Ali Free Zone, VAT is charged at 5%.
Situation 3: Services Received from Outside the UAE
When a firm in a designated zone receives services from outside the UAE, the services are taxable under the reverse charge mechanism. The recipient of the services is liable to pay the tax when filing their VAT returns.
Example: If QPR firm in Jebel Ali Free Zone avails advertising services from IJK firm in the USA, QPR firm must pay VAT at 5% under the reverse charge mechanism.
How Unicorn Global Solutions Can Assist
Firms operating in the UAE and conducting business across different zones require expert assistance to navigate the complexities of VAT implementation and return filing. Unicorn Global Solutions offers comprehensive VAT services in Dubai, including VAT return filing, ensuring VAT compliance, and providing accounting services. Our expert team delivers robust, custom-tailored solutions to meet your business needs.
For more information on how Unicorn Global Solutions can support your VAT and financial requirements, feel free to contact us. Text us on WhatsApp or call us today.
