Designated Zones in the UAE

Unlocking the Mysteries of Designated and Non-Designated Zones in the UAE

In the intricate web of the United Arab Emirates (UAE) tax system, the concept of designated and non-designated zones holds significant sway. Understanding these zones and their implications is pivotal for businesses operating within the UAE. In this detailed exposé, we will navigate through the intricacies of designated zones, how to identify them, the ir impact on VAT (Value Added Tax), and much more.

What is a Designated Zone?

Designated zones, according to UAE VAT law, refer to specific areas deemed outside the UAE territory for VAT purposes. These zones are established to promote economic activity, encourage investment, and facilitate trade within the UAE. Designated zones enjoy special VAT regulations distinct from those in non-designated areas.

How to Identify a Designated Zone?

Identifying a designated zone involves recognizing specific criteria outlined by UAE authorities. Designated zones must meet stringent requirements such as being fenced, having dedicated security measures, customs control units, and robust regulations for handling goods. Additionally, designated zones must comply with all regulations stipulated by the Federal Tax Authority (FTA).

List of Designated Zones in the UAE

Cabinet decision No. 59 provides a list of the approved free zones as follows:

Emirate	Designated Zone
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, services rendered within designated zones are considered to take place within the UAE territory, thus subject to standard VAT rates. However, services exported outside the GCC states may be zero-rated.

Supply of Goods within Designated Zones

Since the location of supply is deemed to be outside the UAE territory, goods traded within authorized zones are typically not subject to VAT. However, if goods are intended for private use within the UAE, standard VAT rules apply.

Examples of VAT Treatment for Supply of Goods within Designated Zones

Consider the following scenarios:

Scenario	Place of Supply	VAT Treatment	Reason
A company purchases raw materials for manufacturing furniture within the designated zone	Designated Zone	Outside the scope of VAT	Raw materials are used directly in the production process
A business buys office equipment for internal use within the designated zone	Designated Zone	Within the scope of VAT	Office equipment is directly consumed by the business
An individual buys luxury items for personal use within the designated zone	Designated Zone	Within the scope of VAT	Goods intended for non-business, personal use
A company purchases electronics components to assemble smartphones for export	Designated Zone	Outside the scope of VAT	Components are used in manufacturing goods for export

Examples of VAT Treatment for Supply of Goods within Non-Designated Zones

Consider the following scenarios:

Scenario	Place of Supply	VAT Treatment	Reason
A company purchases office supplies for internal use within the non-designated zone	Non-Designated Zone	Subject to standard VAT rates	Office supplies are directly consumed by the business
An individual buys clothing items for personal use within the non-designated zone	Non-Designated Zone	Subject to standard VAT rates	Goods intended for non-business, personal use
A business purchases construction materials for building a commercial property within the non-designated zone	Non-Designated Zone	Subject to standard VAT rates	Construction materials are directly consumed in the project
A retailer purchases electronics for resale within the non-designated zone	Non-Designated Zone	Subject to standard VAT rates	Goods are intended for resale within the same zone

Role of Corporate Tax:

In designated zones, businesses can benefit from favorable tax regimes compared to non-designated areas. The UAE does not levy corporate income tax at the federal level, but individual emirates may have their own tax regulations. In designated zones:

1. Corporate Tax Exemptions: Many designated zones offer corporate tax exemptions for a certain period, allowing businesses to reinvest their profits and fuel expansion without the burden of taxation.

1. Withholding Tax Benefits: Dividend and interest payments made by companies operating within designated zones are often exempt from withholding tax, providing additional financial advantages.
2. Value Added Tax (VAT) Considerations: While the UAE imposes VAT, designated zones may offer special arrangements or exemptions for certain goods and services, reducing the overall tax burden for businesses.In contrast, non-designated areas in the UAE are subject to standard tax regulations, including corporate income tax and VAT. Businesses operating outside designated zones may face higher tax liabilities and regulatory complexities.

Transfer of Goods from Outside of UAE into Designated Zones

Supplies of goods from outside the UAE into designated zones are considered outside the UAE territory, thus not subject to VAT.

Transfer of Goods from Mainland UAE into Designated Zones

Transfers of goods from mainland UAE into designated zones are treated as local movements or supplies and are subject to VAT.

Transfer of Goods between Designated Zones

The transfer of goods between designated zones is exempt from VAT if certain conditions are met, such as non-utilization or modification of goods and compliance with customs suspension regulations.

Import of Goods from Designated Zones

Importing goods from designated zones into mainland UAE is subject to import VAT. However, subsequent sales of these goods in mainland UAE may also attract VAT.

Supplies of Water and Energy in Designated Zones

Supplies of water and energy within designated zones are considered outside the scope of VAT, except for personal consumption or production purposes.

Supplies of Real Estate in Designated Zones

Sales and leases of real estate within designated zones are exempt from VAT. Construction materials purchased within designated zones for real estate development are also exempt.

Tax Groups in Designated Zones

Businesses operating within designated zones have the option to form tax groups, allowing them to consolidate their VAT liabilities and benefits with onshore companies or entities located in different designated zones. Tax groups are liable for import VAT if goods are imported into mainland UAE.

Branches in Designated Zones

Transfers of goods between branches of the same business within designated zones are not subject to VAT, except for imports into mainland UAE.

VAT Recovery in Designated Zones

Businesses registered in designated zones can recover VAT on taxable supplies made within designated zones, subject to certain conditions and limitations.

In conclusion, designated zones in the UAE play a crucial role in the country\’s economic landscape. Understanding the intricacies of VAT regulations within these zones is essential for businesses to navigate successfully and ensure compliance with UAE tax laws. As businesses continue to thrive and expand within designated zones, staying abreast of VAT regulations and leveraging them effectively will be key to sustained growth and prosperity.