VAT and Free Zones in the United Arab Emirates

What Are Designated Zones?

Designated zones are zones specified by official decisions for VAT purposes and are subject to specific conditions and requirements.

The VAT treatment of certain goods transactions within designated zones may differ from transactions taking place within the UAE mainland. However, not every free zone is automatically treated as a designated zone for VAT purposes.

Difference Between a Free Zone and a Designated Zone

Many business owners confuse a Free Zone with a Designated Zone.

• A Free Zone is an economic zone licensed and regulated under its own rules.
• A Designated Zone is a zone recognized for VAT purposes under the applicable VAT rules and decisions.
• Being located in a free zone does not automatically mean that all transactions are outside the scope of VAT.
• The VAT treatment depends on the nature of the supply, movement of goods, and supporting documents.

VAT Services for Free Zones

We provide VAT services for companies operating in free zones and designated zones to help them determine the correct VAT treatment and reduce tax risks.

VAT Registration

• Reviewing the company’s VAT registration position.
• Reviewing taxable supplies and outside-scope supplies.
• Determining whether VAT registration is mandatory or voluntary.
• Preparing and following up VAT registration applications.

VAT Deregistration

• Reviewing VAT deregistration conditions.
• Reviewing supplies and transactions before submitting the deregistration request.
• Preparing the VAT deregistration application.
• Following up the request with the Federal Tax Authority.

Review of VAT Transactions

• Reviewing sales and purchases.
• Reviewing the movement of goods between designated zones.
• Reviewing transactions between free zones and the UAE mainland.
• Reviewing import and export transactions.
• Determining the correct VAT treatment of outside-scope supplies.

Tax Audit Support

• Preparing required records and supporting documents.
• Reviewing previous transactions.
• Providing support during VAT audit procedures.
• Responding to enquiries related to free zone transactions.

VAT Issue Resolution

• Incorrect VAT registration.
• Incorrect VAT treatment.
• Issues related to outside-scope supplies.
• Issues related to movement of goods.
• VAT penalties and violations.

Outside-Scope VAT Supplies

Some transactions may be outside the scope of VAT under the VAT Law and Executive Regulation, but this is not determined merely by being located in a free zone.

Determining whether a transaction is outside the scope requires reviewing the nature of the supply, place of supply, movement of goods, supporting documents, and designated zone conditions where applicable.

Movement of Goods Between Designated Zones

The VAT treatment may differ depending on the direction of movement and the nature of the transaction.

• From one designated zone to another designated zone.
• From a designated zone to the UAE mainland.
• From the UAE mainland to a designated zone.
• From a designated zone to outside the UAE.

Each case requires reviewing the supporting documents, movement of goods, and nature of supply to determine the correct VAT treatment.

Imports and Exports in Free Zones

Import and export transactions are closely connected to free zones and designated zones. Shipping documents, customs documents, and proof of export may affect the VAT treatment.

The following documents should be reviewed when determining the VAT treatment:

• Customs documents.
• Shipping documents.
• Commercial and tax invoices.
• Export documents.
• Proof of movement of goods outside the UAE where required.

Services Supplied Within Free Zones

In many cases, services are treated differently from goods within free zones. Therefore, the same rule should not be applied to all transactions without proper review.

The place of supply, place of benefit, nature of the customer, and type of service should be reviewed to determine the correct VAT treatment.

VAT Registration and Deregistration for Free Zone Companies

VAT registration and deregistration rules for free zone companies generally follow the normal VAT rules, except for certain cases related to the nature of activities and transactions.

Therefore, taxable supplies, outside-scope supplies, and transaction values should be reviewed carefully before deciding whether to register or deregister.

Common VAT Mistakes in Free Zones

• Treating all free zone transactions as outside the scope of VAT.
• Confusing a free zone with a designated zone for VAT purposes.
• Relying only on the trade licence without reviewing the actual transaction.
• Failing to maintain proof of movement of goods.
• Errors in proving export and movement of goods outside the UAE.
• Treating services in the same way as goods without reviewing the place of supply.
• Registering or deregistering for VAT without reviewing the thresholds and requirements.

Required Records and Documents

VAT treatment for free zones depends heavily on supporting documents and evidence of the movement of goods.

• Tax and commercial invoices.
• Shipping documents.
• Customs documents.
• Sale and purchase agreements.
• Inventory records.
• Bank statements.
• Import and export records.

VAT Audit for Free Zones

The Federal Tax Authority may review the movement of goods, customs documents, inventory records, transactions between designated zones, and supplies treated as outside the scope of VAT.

Proper organization of documents and review of VAT treatment before a tax audit helps reduce risks and present the company’s position more clearly.

VAT Penalties and Violations

Penalties may arise due to incorrect VAT registration, incorrect VAT treatment, missing documents, late VAT returns, or delay in VAT deregistration when required.

How Can We Help?

We assist businesses operating in Free Zones with VAT treatment of goods and services, outside-the-scope transactions, movement of goods, and compliance with UAE VAT requirements applicable to Free Zones.

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