VAT and Freezones
The broader definition of Free Zones and the implications of VAT on companies operating in Free Zones is not explicitly does mentioned in the legislation. However, it does cover Designated Zones which comply to a set of specific criteria to qualify.
The legislation states that VAT is not due on the transfer of goods from one Designated Zone to another, or when importing goods into Designated Zones from outside the UAE.
Such zones are defined as specific fenced geographic areas which conform to greater security procedures set by their respective Authorities with customs controls in place to monitor movements of individuals and goods to and from the areas. Additionally, they have internal procedures regarding the method of keeping, storing and processing of goods.
There are over 45 Free Zones in the UAE, however only 20 were named as Designated Zones (listed below). Therefore, for VAT purposes, the rest of the free zones are considered in the UAE mainland.
Designated Zones (Abu Dhabi)
Free Trade Zone of Khalifa Port
Abu Dhabi Airport Free Zone
Khalifa Industrial Zone
Designated Zones (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
Designated Zones (Sharjah)
Hamriyah Free Zone
Sharjah Airport International Free Zone
Designated Zones (Ajman)
Ajman Free Zone
Designated Zones (Um m 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
Designated Zones (Ras Al Khaimah)
RAK Free Trade Zone
RAK Maritime City Free Zone
RAK Airport Free Zone
Designated Zones (Fujairah)
Fujairah Free Zone
FOIZ (Fujairah Oil Industry Zone)
For companies operating from a Designated Free Zone, there is a need to understand the implications of the introduction of VAT as it can pose additional challenges in the UAE.
Companies have to carefully atomise and understand each of their transactions. Depending on the origin and destination of the goods combined with the location of buyer and seller, the VAT treatments can be completely different.
In the UAE, companies have to consider the VAT treatment of transactions with Designated Zones:
• Local sale from UAE to a Designated Zone – 5% because as a domestic sale
• Local sale from Designated Zones to UAE mainland – Import taxable at 5%
• Local sales from Designated Zones to Designated Zones – VAT is not applicable
• Local sales within Designated zones – No VAT applicable (except for retail sales)
• Export from Designated Zones to GCC countries/Outside GCC country – 0% VAT as treated as an export
These scenarios highlight the gravity in defining specific transactions and accurately identifying place of supply, ensure supporting documentation is in place and correctly capturing transactions for VAT compliance and reporting.
It is not unusual for tax regimes to become more complex overtime. Therefore flexibility is your VAT systems will be key to ensure internal VAT compliance framework and IT system are setup to cope with any future change in legislation.
Applying the wrong treatment can lead to either overstate VAT liability (which in turn leads to cashflow and margin issues) or to understate VAT liability (which leads to compliance issues and fines).