All you need to know about Designated Zones in the UAE: FAQs

What are Designated Zones? 

Designated Zones are areas identified by the UAE Cabinet as eligible for special treatment under the UAE VAT law. A Free Zone (fenced or unfenced) that does not qualify as a Designated Zone will not receive special VAT treatment.

What requirements should a Designated Zone meet to be treated as a territory outside the UAE for VAT purposes?

A Designated Zone must be a specific fenced area, in addition to meeting all of the following requirements:

• It must adhere to strict control criteria laid out by the government.
• The operator must keep detailed records of goods supplied.
• Security and customs procedures must have been implemented to control the movement of goods and people within the designated zone.
• Internal procedures should be followed related to keeping, storing and processing of goods within the area. 
• The operator of a Designated Zone must adhere to the procedures set out by the FTA. 

If a Designated Zone changes the way it operates, or does not meet any of the criteria mentioned above, then it will be considered a part of the UAE for VAT purposes. 

What are the designated zones in 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 

What are the designated zones in 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

What are the designated zones in Sharjah?

• Hamriyah Free Zone
• Sharjah Airport International Free Zone

What are the designated zones in Ajman?

• Ajman Free Zone

What are the designated zones in 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

What are the designated zones in Ras Al Khaimah?

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

What are the designated zones in Fujairah?

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

What is the place of supply and VAT treatment for services supplied in a Designated Zone?

The place of supply for all services, including services supplied in a Designated Zone, is considered to be the UAE. Therefore all supplies of services are subject to normal VAT rules. Exports of services made to persons or businesses outside the GCC states are zero-rated. 

What is the place of supply and VAT treatment for goods supplied in the Designated Zone?

If the goods are supplied within a Designated Zone, then the place of supply is considered to be ‘offshore’ or outside of the UAE. Therefore, the goods supplied will not be subject to VAT. 

In most cases, the authorities expect a written declaration from the buyer that the purchased goods will not be used for purposes that will make the sale fall under the purview of VAT. 

If the goods are supplied to a person who will be consuming them, then the place of supply will be the UAE and VAT will be applicable under normal rules. 

If a person purchases the goods with an intention to resell or manufacture any other product using these goods as the main component, then the supply will not be subject to VAT. 

How is VAT applied on goods and services in the Designated Zones?

Certain goods supplied within the Designated Zones are not subject to VAT. For supplies of services, the VAT treatment in the Designated Zones is the same as in the rest of the UAE. 

What are some examples of supplies made in a Designated Zone and their UAE VAT treatment?

The following table provides examples of VAT treatment of supplies taking place in a Designated Zone. 

What type of goods will be outside the scope of UAE VAT if sold in designated zone?

If the supplied goods meet any of the following conditions, then the supply will not be subject to VAT.

• Goods that are incorporated into, attached to, or a part of another good that is not consumed and is located in the Designated Zone. 

• Goods that are used to produce another good, which is not consumed, if both of these goods are located in the Designated Zone. For example, the purchase of tools and equipment used to manufacture other goods will not be subject to VAT, if both are located in the Designated Zone. 

How are supplies made from the UAE or a region outside UAE to a Designated Zone treated under VAT?

If a supply is made to a Designated Zone from outside the UAE, then the supply is considered to be made outside the UAE. Therefore, VAT will not be applicable on such supplies. 

If the supply is made from mainland UAE to a Designated Zone, then the supply will not be considered an export of goods from the UAE. It will be treated as a local supply. 

How are transfers of own goods between two Designated Zones treated under the UAE VAT law?

The supply, sale, or movement of own goods will be considered to be outside the scope of VAT only if both of the following conditions are met:

• The goods transferred are not partly or entirely meant to be circulated, used, or altered in any manner during the transfer.

• The transfer of goods is made as per the rules for customs suspension set by the GCC Common Customs Law. 

The FTA may require the owner of the goods to provide a financial guarantee for the payment of VAT, in case the conditions mentioned above are not met. 

How are goods moving from a Designated Zone to the mainland UAE treated?

When goods move from a Designated Zone to the mainland UAE, it is considered to be import of goods into the UAE and import VAT must be paid by the importer. 

There are certain situation where the importer has purchased goods that are subject to VAT from a Designated Zone and imports them into the mainland UAE. In such situations, the importer will be able to recover the import VAT paid in full. For an importer to be eligible for this tax recovery, the goods purchased in a Designated Zone must be the same goods imported into the UAE. The importer must also keep evidence of the purchase and the import in case the authority needs proof. 

How will VAT recovery for businesses operating in Designated Zones work?

A business located in a Designated Zone will have to adhere to the normal VAT recovery rules as follows:

• Businesses that make taxable supplies, or make supplies that would be taxable if they took place in the UAE, can recover the VAT paid on expenses in full. 

• Businesses that make supplies that do not give the right to VAT recovery will be unable to recover VAT on expenses that can be directly attributed to making the supply. 

• Businesses need to apportion VAT paid on expenses that are partly recoverable and partly non-recoverable. This is to identify the recoverable part. 

• Businesses must be registered for VAT with the FTA in order to be able to recover VAT. 

Under what conditions is the supply of goods between designated zones free from VAT?

Yes. Here are the conditions under which the supply between designated zones will not be taxed:

• The goods should not be released during the process of transfer between the designated zones
• The transportation of goods should comply with the rules set by the GCC common customs law.
• The goods should not be used, consumed or altered during the transfer between the designated zones.

What is the VAT treatment for goods supplied from a designated zone to a VAT registered business owner in UAE mainland?

If goods are supplied from a designated zone to a VAT registered business owner in UAE mainland, the recipient will pay import VAT to the customs department while clearing the goods from the designated zone.

What is the VAT treatment for services supplied from a designated zone to a VAT registered business owner in UAE mainland?

In this case, the recipient will be taxed for the services at 5% VAT.

What is the VAT treatment for goods supplied from a designated zone to a non-registered business owner in UAE mainland?

When goods or services are supplied from a designated zone to a non-registered business owner in UAE, the recipient will be taxed at 5% for the supply.

What is the VAT treatment for goods supplied by a registered business owner from the UAE mainland to a business located in a designated zone?

In this case, the business located in the designated zone will be taxed for the supply at 5%.

What is the VAT treatment for goods supplied from one designated zone to another?

The goods supplied in this case are considered outside the scope of VAT. This rule applies until the recipient chooses to use the goods for self-consumption.

What is the VAT treatment for services supplied from one designated zone to another?

In this case, the recipient will be taxed at 5% for the supply of services.

The VAT treatment for supply of goods between designated zones varies from the VAT treatment of services. This is mainly because, if services are supplied to a designated zone, the place of supply for those services is considered to be inside the UAE (mainland).

Is VAT applicable on subsequent sales made with goods that were imported from a Designated Zone?

In some cases VAT may be charged for subsequent sales of the imported goods in the mainland UAE. The VAT applicability will entirely depend on the date of supply, which will be determined on a case-by-case basis. 

When is a supply made from a Designated Zone to the UAE considered as an import?

If the owner has not paid VAT for the goods that meets the following conditions, then the supply is considered to be an import:

• The owner of the goods has not paid VAT.
• The goods are located in a Designated Zone.
• The owner will consume the goods. The goods must not be incorporated into, attached to, or partly or wholly used in the production of another good located in a Designated Zone. The other good is not consumed wholly or directly. 
• The goods must be unaccounted for. 

What is the VAT treatment for goods and services exported to a different state from a designated zone?

• If goods are exported to a different state from a designated zone, they are considered to be out-of-scope supply.
• If services are exported to a different state from a designated zone, the recipient will be taxed at 0% VAT.

What is the VAT treatment for goods and services imported from a different state from a designated zone?

• If goods are imported from a different state into a designated zone, they are considered to be out-of-scope supply.
• If services are imported from a different state into a designated zone, the business located in the designated zone should account for VAT under the reverse-charge mechanism.

How is the supply of water and energy in the Designated Zones treated under VAT?

The supply of water and energy provided for consumption purposes by the water and energy authorities in a Designated Zone will be subject to VAT. This rule is applicable even if the water and energy supplied is used for the production of goods. 

In certain cases, the supply of water and energy traded by businesses may be outside the scope of VAT. 

How does the supply of real estate work in the Designated Zones?

As a general rule, the place of supply for real estate is the location of the real estate. As per this rule, the supply of real estate within a Designated Zone will be considered as a supply made outside the UAE. Therefore, VAT not be applicable on such supplies. 

Any real estate that is not supplied through selling, leasing, or renting is considered to be real estate service. All real estate services—including but not limited to granting personal rights to use real estate, licensing for occupation of real estate, and the provision of contractual rights that can be exercised on real estate, including the right to use hotel accommodations or similar establishments—are taxable in the Designated Zones.

How does the VAT treatment work for supplies made between offices that are spread across the Designated Zones and the mainland UAE?

A main office or branch office located in a Designated Zone may supply goods to a main office or branch office located in the mainland UAE. Such supplies are considered to be intra-entity supplies and are therefore outside the scope of VAT. However, there are cases where the companies belong to the same tax group, and the supplies are made from a branch office in a Designated Zone to the head office in the mainland UAE. This type of supply will be considered as importation of goods and will be subject to import VAT, if different custom codes are used in the documents by the office located in Designated Zone, and the office located in mainland UAE . 

Unregistered entities will have to pay import VAT before the goods are moved from the Designated Zone.