All About the Designated Zones in UAE

On supplies of products and services in the UAE, VAT is charged. The UAE does not include certain regions, referred to as "free zones," on its map.

Not all free zones, though; only a select group of free zones identified in a cabinet decision have unique, restricted VAT restrictions. Designated Zones are the mentioned free zones.

For VAT purposes, these areas are referred to as designated zones in UAE. VAT is not applied to purchases made either inside or outside of a specified zone (with some exceptions).

To be recognized as a territory outside the UAE, a zone must nevertheless meet the following requirements even if it is named as such:

• A barrier must surround the zone.
• To monitor the movement of people and commodities into and out of the zone, the zone must have security measures and a customs control unit of its own.
• There must be clear rules for the processing, retrieval, and storage of products inside the zone.
• The zone's operator is obligated to abide by all FTA rules and regulations.
• Strict eligibility requirements apply to businesses operating in specified zones, and they must maintain meticulous records.

List of Designated Zones in UAE

The following UAE freezones are included as designated zones in Cabinet Decision No. 59.

Abu Dhabi

• Abu Dhabi Airport Free Zone
• Free Trade Zone of Khalifa Port
• Khalifa Industrial Zone
• Al Butain International Airport Free Zone 
• Al Ain International Airport Free Zone.

Dubai

• Dubai Cars and Automotive Zone (DUCAMZ)
• Jebel Ali Free Zone (North-South)
• Dubai Textile City
• Free Zone Area in Al Qusais
• Free Zone Area in Al Quoz
• Dubai Aviation City
• International Humanitarian City – Jebel Ali
• Dubai Airport Free Zone.

Sharjah

• Sharjah Airport International Free Zone
• Hamriyah Free Zone.

Ajman

• Ajman Free Zone

Umm Al Quwain (UAQ)

• UAQ Free Trade Zone on Sheikh Mohammed Bin Zayed Road
• UAQ Free Trade Zone in Ahmed Bin Rashid Port.

Ras Al Khaimah

• RAK Maritime City Free Zone
• RAK Free Trade Zone
• RAK Airport Free Zone.

Fujairah

• Fujairah Oil Industry Zone (FOIZ)
• Fujairah Free Zone.

Supply of Services and Goods in the UAE Designated Zones

Let us have a look at the types of goods and services in the UAE-designated zones.

Service Provision Within Defined Zones

According to the standard regulations of VAT implementation in UAE, a service supply is regarded to have occurred in the UAE if the place of supply is a designated zone. As a result, the usual rate of VAT will apply to practically all services.

However, the services can be regarded as zero-rated supplies if they are exported or, put another way, provided to a person who resides outside of the GCC states.

Goods Provision Within Defined Zones

As the point of supply is regarded as being outside the UAE territory, a supply of goods within a defined zone is not subject to VAT. This general rule does not apply when the supply is made inside a defined zone to a person who intends to utilize the materials in any way for private purposes.

In these circumstances, the site of supply is regarded as being on UAE soil, and the provision is subject to standard VAT. The supply is deemed to be exempt from VAT if the customer plans to resell the purchased products or use them to create or manufacture additional goods.

For a supply to be deemed exempt from VAT, the products being acquired must directly relate to the commodities being produced.

Transfer of Commodities into Designated Zones from Outside the UAE

UAE territory does not include a specified zone. It would be deemed an outside supply if items were delivered from outside the UAE to a designated zone inside the UAE. 

Therefore, no VAT will be charged on these supplies.

Moving Items from the UAE's Mainland to Designated Zones

It is not regarded as an export of goods when items are moved or supplied locally from the mainland UAE to a specified zone in the UAE. It is, therefore, liable to VAT.

Commodities Movement between Defined Zones

If the following criteria are satisfied, the movement and supply of products between separate designated zones in the UAE are exempt from VAT. It is forbidden to use, tamper with, or otherwise alter the products that are being transferred.

The transfer procedure must follow the GCC Common Customs Law's procedures for suspending customs. If the aforementioned requirements are not completed, the FTA may ask the owner of the goods for a financial guarantee for the VAT owed.

Importing Products from Specified Zones

Goods imported into the UAE from a specified zone on the country's mainland are regarded as imports and are, therefore, subject to import VAT. The individual importing the goods may recover the import VAT incurred while importing the items into the mainland UAE if VAT was imposed on the goods when they were purchased inside the specified zone and again when they were imported. 

Only if the imported products match those bought in the designated zone can the entire VAT amount be reclaimed. When claiming import VAT, the Federal Tax Authority (FTA) could require the buyer to provide proof of purchase.

Any future sale of the items in the mainland UAE may also be liable to VAT, even if the imported goods are subject to import VAT. The date of supply for the subsequent sale will determine when VAT is assessed.

Water and Energy Supplies in Defined Zones

Electricity, gas, coal gas, biogas, liquefied petroleum gas, natural gas, oil gas, refinery gas, reformed natural gas, temperate liquefied petroleum gas, and any combination of gases are all included under the umbrella word "energy." Within specified zones, sources of electricity and water are regarded as products. 

As was mentioned in the section on the supply of products inside a defined zone, these supplies are, therefore, not subject to VAT. Water and energy, however, are liable to VAT if they are provided for personal use (like power from the electrical board). 

This also holds true for the energy and water supplies needed to produce other items in the defined zones. The aforementioned supplies are not subject to VAT if they are exchanged between companies located in the authorized zones.

Real Estate Availability in Defined Zones

The site of supply is wherever the real estate is located, and sales and leases of real estate in defined zones are treated as supplies of products. Real estate located in a designated zone is exempt from VAT because its place of supply is there. 

VAT will not apply to building supplies bought within the same authorized zone for the development of the real estate. Real estate is seen as a real estate service when it is not provided as a buy or a lease. 

These include granting consent to use or occupy the real property, establishing legal rights to real property, and gaining consent to utilize hotel rooms or other lodgings at a business with similar objectives. According to the VAT law, and as was described in the section of this handbook devoted to the supply of services, these supplies will be taxed as real estate services.

Designated Zones in UAE – The Tax and VAT Scenario

Let us have a look at the tax and VAT scenario in the UAE-designated zones.

Tax Groups in Specified Areas

A company founded in a designated zone may join forces with one or more onshore businesses or businesses founded in various designated zones to form a tax group. The tax group shall be responsible for importing VAT if a supply of goods among tax group members results in items being imported from a defined zone into the mainland UAE.

Branches in Specific Areas

Goods transfers between entities of the same company (such as a branch and a headquarters) are regarded as intra-entity supplies and are exempt from VAT. However, a transfer in which products are brought into the mainland from a specified zone will be regarded as a regular import and subject to the corresponding taxes.

Revenue from VAT in Defined Zones

Under the following conditions, companies with registered addresses in designated zones may be eligible to recoup VAT on supplies made in those areas:

• If the company makes taxable goods or taxable supplies that would be taxable if they were produced on UAE soil, they should be able to recoup the input VAT they paid for those taxable supplies.
• The company will not be able to recoup input VAT paid for costs associated with taxable supplies if the company makes supplies that are exempt from VAT (such as exempted and zero-rated goods).
• If an expense is for both the supplies that are eligible for VAT recovery and supplies that are not, the business should divide the VAT paid on such expenses into recoverable and non-recoverable halves.

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