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Understanding designated zones in the United Arab Emirates
What is a designated zone?
VAT is levied on supplies of goods and services in the UAE territory. Certain areas, called free zones, are omitted from the UAE territory. However, not all free zones are excluded from VAT — only certain free zones listed in a cabinet decision have special restricted regulations for VAT. These listed free zones are called Designated Zones. A designated zone in the UAE is an area which is considered to be outside the UAE territory for VAT purposes.
Supplies made from inside or outside a designated zone are free of VAT (with some exceptions).
How to identify a designated zone?
Free zones are not normally considered VAT-free, and are subject to normal VAT for supplies of goods and services. Certain free zones, however, fulfil the criteria specified in the Federal Decree-Law on VAT and Executive Regulations for being treated as a designated zone.
These designated zones are listed in a cabinet decision. But even if a zone is marked as a designated zone, it still has to fulfil the following criteria to be treated as a territory outside the UAE:
- The zone must be a fenced area.
- The zone must have its own security measures and customs control unit for monitoring the movement of individuals and goods in and out of the zone.
- There must be well-defined regulations for the storing, retrieving and processing of goods within the zone.
The operator of the zone must comply with all the rules and regulations put forth by the FTA.
Businesses operating in designated zones are subject to strict qualifying criteria and must keep thorough records.
List of designated zones in the UAE
Cabinet decision No. 59 lists the following free zones as designated zones.
Abu Dhabi
- Free Trade Zone of Khalifa Port
- Abu Dhabi Airport Free Zone
- Khalifa Industrial Zone
- Al Ain International Airport Free Zone
- Al Butain International Airport Free Zone
Dubai
- Jebel Ali Free Zone (North-South)
- Dubai Cars and Automotive Zone (DUCAMZ)
- Dubai Textile City
- Free Zone Area in Al Quoz
- Free Zone Area in Al Qusais
- Dubai Aviation City
- Dubai Airport Free Zone
- International Humanitarian City – Jebel Ali
Sharjah
- Hamriyah Free Zone
- Sharjah Airport International Free Zone
Ajman
- Ajman Free Zone
Umm Al Quwain
- Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
- Umm Al Quwain Free Trade Zone on Sheikh Monhammed Bin Zayed Road
Ras Al Khaimah
- RAK Free Trade Zone
- RAK Maritime City Free Zone
- RAK Airport Free Zone
Fujairah
- Fujairah Free Zone
- Fujairah Oil Industry Zone (FOIZ)
Supply of services within designated zones
Under standard VAT rules, if the place of supply for a supply of services is a designated zone, it is considered to take place in the UAE. This means that almost all services will be subject to VAT at the standard rate. But if the service is exported, or in other words made to an individual who is a resident and located outside the GCC states, then the services may be considered as zero-rated supplies.
Supply of goods within designated zones
A supply of goods within a designated zone is not subject to VAT, as the place of supply is considered to be outside the UAE territory. This standard rule is not valid in cases where the supply is made within a designated zone to a person who intends to utilise the goods in any way for private purposes. In such cases, the place of supply is considered inside the UAE territory and the supply is subject to normal VAT.
If the buyer intends to resell the purchased goods or use them to produce or manufacture other goods, then the supply is considered outside the scope of VAT. The goods being purchased must have a direct connection with the goods being produced for the supply to be considered outside the scope of VAT. For example, teakwood used in manufacturing furniture is considered outside the scope of VAT, as it has a direct connection with the goods being manufactured. However, a computer used to create an architectural plan for the construction of a building is not considered outside the scope of VAT, as the computer has no direct connection with the construction of the building. If the buyer purchases goods in a designated zone and attaches them to other goods in the same designated zone in such a way that both form a part of the final product, then the supply would be outside the scope of VAT.
Examples of VAT treatment for supply of goods within designated zones
Here are some examples of how to apply the default rule for the supply of goods within a designated zone and some cases where the default rule is overridden.
| Scenario | Place of supply | VAT treatment | Reason |
|---|---|---|---|
| A business buys chinaware for the purpose of resale within the designated zone. | Designated Zone | Outside the scope of VAT | The resale of goods is not treated as consumption under VAT law. |
| A business buys tools to use in manufacturing goods which will be sold in the designated zone by the manufacturer. | Designated Zone | Outside the scope of VAT | Even though the tools are used by the manufacturer, it is used to produce other goods which are not consumed by the manufacturer. |
| An individual buys goods in a designated zone to be used for private purposes. | Designated Zone | Within the scope of VAT | Since goods are used for non-business purposes, VAT will be applicable. |
| A business in the designated zone buys office supplies like stationery and furniture for the office. | Designated Zone | Within the scope of VAT | Goods purchased here will be directly consumed by the business and will not be used to produce another good that will be sold. |
Transfer of goods from outside of UAE into designated zones
A designated zone is not considered UAE territory. A supply of goods from outside the UAE to a designated zone in the UAE would be considered a supply taking place outside the UAE. Hence, VAT won’t be levied on such supplies.
Transfer of goods from mainland UAE into designated zones
The movement and supply of goods from the mainland UAE to a designated zone in the UAE is not considered as export of goods, but as local movement or supply. Hence, it is subject to VAT.
Transfer of goods between designated zones
The movement and supply of goods between different designated zones in the UAE is outside the scope of VAT if the following conditions are met:
The goods being transferred should not be used, tampered, or modified in any way.
The transfer process should be in accordance with the regulations for customs suspension per the GCC Common Customs Law.
The FTA might require a financial guarantee from the owner of the goods for the VAT liable if the conditions above are not met.
Import of goods from designated zones
The import of goods from a designated zone in the UAE to the mainland UAE is considered an import of goods to the UAE and will be subject to import VAT.
If VAT was levied on the goods when they were bought within the designated zone and then again while importing into the mainland UAE, the person importing the goods can recover the import VAT incurred while importing the goods into the mainland UAE. The complete VAT amount can only be recovered if the goods imported are the same as the goods purchased in the designated zone. The FTA might ask the buyer to submit proof of purchase while claiming import VAT.
Even if the goods imported are subject to import VAT, any subsequent sale of the goods in the mainland UAE may also be subject to VAT. The VAT levied will be decided on the date of supply of the subsequent sale.
The following table lists potential scenarios involving taxable supplies and their VAT treatments.
| Scenario | Phase 1 | VAT treatment of phase 1 | Phase 2 | VAT treatment of phase 2 |
|---|---|---|---|---|
| Goods are imported from a DZ into mainland or Goods are sold in the mainland by the importer | Import of goods from a DZ into mainland | Import VAT levied on the imported goods | Sale of goods in the mainland | The seller charges VAT on the supply (if taxable) |
| Goods are sold within a designated zone and will not be used or consumed by the buyer or The goods are imported into the mainland by the buyer | Sale of goods within designated zone | Outside the scope of VAT | Import of goods from designated zone to mainland | Import VAT levied on the imported goods |
| Goods are sold within a designated zone and will be used or consumed by the buyer or the goods are imported into the mainland by the buyer | Sale of goods within designated zone | The seller charges VAT on the supply (if taxable) | Import of goods from designated zone to mainland | Import VAT levied on the imported goods (can be recovered in VAT returns) |
Supplies of water and energy in designated zones
The term energy refers to electricity, gas, biogas, coal gas, liquefied petroleum gas, natural gas, oil gas, producer gas, refinery gas, reformed natural gas, tempered liquefied petroleum gas, and any mixture of gases.
Supplies of water and energy within designated zones are considered supplies of goods. Therefore these supplies are outside the scope of VAT, as discussed in the Supply of goods within a designated zone section. But if water and energy are supplied for personal consumption (like electricity supplied by the electricity board), then the supply is subject to VAT. This is also applicable for supplies of water and energy for production of other goods in the designated zones. If the supplies mentioned above are traded by businesses within the designated zones, then they are outside the scope of VAT.
Supplies of real estate in designated zones
Sales and leases of real estate in designated zones are treated as supplies of goods, and the place of supply is wherever the real estate is located. Since the place of supply for real estate in a designated zone is in the designated zone, it is not subject to VAT. Construction materials purchased within the same designated zone for developing the real estate will also be outside the scope of VAT.
In cases where real estate is not supplied in the form of a purchase or a lease, it is considered a real estate service. This includes granting rights to use or occupy real estate, contractual rights over real estate, and rights to use the accommodations of a hotel or an establishment with similar purposes. As mentioned in the Supply of services section of this guide, these supplies will be taxed as real estate services under the VAT law.
Tax groups in designated zones
A business established in a designated zone can form a tax group with one or more onshore companies, or companies established in different designated zones. If a supply of goods among tax group members results in goods being imported from a designated zone into the mainland UAE, then the tax group will be liable for import VAT.
Branches in designated zones
Transfers of goods between entities of the same business (such as a branch and a head office) are considered intra-entity supplies and are not subject to VAT. However, a transfer in which goods are being imported into the mainland from a designated zone will classify as a normal import and will be taxed accordingly.
VAT recovery in designated zones
Businesses that are registered in designated zones will be able to recover VAT on supplies made in designated zones, under the following circumstances:
If the business makes supplies that are liable to VAT, or supplies that would be liable to VAT if it was made in the UAE territory, the business should be able to recover the input VAT paid for those taxable supplies.
If the business makes supplies that do not incur VAT (like exempted and zero-rated supplies), the business will not be able to recover any input VAT paid for expenses related to those taxable supplies.
If an expense is for both supplies that are not eligible for VAT recovery and supplies which are eligible for it, then the business should divide the VAT paid on those expenses into recoverable and non-recoverable parts.