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A Guide to VAT Treatment on Services Received in Designated Zones in UAE

Historically, free zones have been excluded from the territorial scope of the UAE’s Value Added Tax regulations. And as per the UAE VAT regulations, only those free zones listed in a Cabinet Decision qualify for special VAT treatment. Such free zones are termed Designated Zones and businesses must understand the VAT treatments of services received in designated zones before undertaking relevant transactions. Tax agents in Dubai can help you assess the VAT treatment on services received in designated zones in the UAE.

The VAT treatment on services received in the Designated Zones is different from that on goods purchased in the Designated Zones. As per the UAE VAT regulations, the Goods purchased in the Designated Zones and outside the State are treated as outside the scope of the VAT. However, similar VAT treatment is not accorded to the supply of services made to the Designated Zone.

In this article, you can get to know in detail about the VAT treatment of services received by Designated Zone under three different scenarios such as services received from Designated Zone, services received from Mainland, and services received from outside the UAE State. However, it is recommended to take advice from VAT consultants in Dubai to make better tax decisions.

Definition of Designated Zones under VAT in the UAE 

As per the UAE VAT regulations, Designated Zones are subject to stringent control criteria. Strict security procedures will be in place to regulate and control the movement of goods and people to and from the Designated Zone. A Designated Zone must have Customs procedures to control the movement of goods into and out of the Designated Zone. Tax agents in Dubai can guide you further about the definition of a Designated Zone.

VAT on Services Received from a Designated Zone 

The UAE considers the supply of services between two Designated Zones taxable at the standard VAT rate of 5%. The standard rate applies in this case as the place of supply for services within the Designated Zone is treated as within the State. For example, ABCD Enterprises, operating in Jebel Ali Free Zone, received IT Services from QPR Technologies, operating in Dubai Airport Free Zone.

Both Jebel Ali Free Zone and Dubai Airport Free Zone are Designated Zones as per VAT in the UAE. Therefore, services supplied by ABCD Enterprises to QPR Technologies will attract VAT at the standard rate of 5%. Consult with VAT consultants in Dubai to accurately assess the VAT on the transfer of services between two Designated Zones.

Services Received from the UAE Mainland

Services supplied from the UAE mainland to a Designated Zone are taxable as per the UAE tax regulations. The mainland is treated as within the State (UAE) and VAT at 5% must be charged in the supply of services. For example, ABCD Enterprises located in the Jebel Ali free zone has received certain IT Services from XYZ Technologies, located in the Dubai mainland. In this case, the supply of IT Services from XYZ Technologies will attract a 5% VAT as the transfer of service happened from a Mainland company to a Designated Zone. Tax agents in the UAE can advise businesses operating in Designated Zones regarding the VAT treatment on services.

Services Received from Outside the UAE State 

It is common for a Designated Zone to receive services from outside the UAE as part of their business requirements. However, such services received from outside the UAE state are taxable on a reverse charge basis. The recipients of such services are required to account for VAT under the reverse charge mechanism and pay the relevant VAT while filing the VAT returns in the UAE.

For example, ABCD Enterprises located in the Jebel Ali Free Zone have received some IT-related services from PQRS Private Ltd, operating in India. In this example, services are supplied from India to Jebel Ali Free Zone, which is a Designated Zone in the UAE. Here, the services supplied by PQRS Private Ltd to ABCD Enterprises will be taxable at the standard VAT rate of 5%. Moreover, ABCD Enterprises is required to account for VAT and pay VAT on the received services on a reverse charge basis.

Consult With the Best Tax Agents in Dubai, UAE 

Companies operating within the UAE Designated Zones must assess the VAT applicability of the services they receive. The businesses must remember that the service they receive is taxable irrespective of whether it is obtained from another Designated Zone or from inside the Mainland. Furthermore, services availed from outside the UAE will be liable for VAT under the reverse charge mechanism. FTA-approved Tax agents in Dubai such as Jitendra Chartered Accountants (JCA) can help businesses assess their VAT liabilities.

JCA is one of the leading VAT consultants in Dubai providing bespoke tax services to all types of business entities. Our FTA-approved tax agents are highly qualified and well-versed in the UAE Tax Laws. JCA offers a one-stop solution for all your tax requirements including VAT registration, VAT return filing in the UAE, VAT reconsideration etc.

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