Guide to VAT in Designated Zones in the UAE

Many mainland companies move their operations to Designated Zones in the UAE because these areas promise special VAT treatment. The rules are clear, yet the way they apply can feel confusing, especially when goods move in and out of these areas.

A small mistake in reporting goods that are used, moved, or lost inside a Designated Zone can trigger unexpected VAT liability in the UAE without warning. To help you avoid these issues, JCA (Jitendra Chartered Accountants) brings here a simple guide that explains how VAT works inside Designated Zones, what “consumption” means, how suppliers must check the buyer’s purpose, and how movements of goods are treated. You can obtain additional guidance from our VAT agents in the UAE.

What Makes an Area a Designated Zone?

Not every free zone in the UAE is a Designated Zone for VAT. An area qualifies only when it meets all of the following conditions:

• It must be a clearly fenced and controlled geographic area.
• There must be security and Customs monitoring at entry and exit points.
• The operator must follow procedures for storing, handling, and processing goods.
• The operator must also follow all rules issued by the FTA.

When all these conditions are fulfilled, the area may be treated as outside the UAE for certain supplies of goods. This treatment does not apply to services.

VAT Duties for Businesses in Designated Zones

A business formed in a Designated Zone is considered established inside the UAE for VAT. This means:

• It may need to register for VAT.
• It must keep proper accounts and submit VAT returns.
• It must pay VAT when required.
• It can join a VAT group if the usual rules are met.
• It can recover input VAT on taxable expenses.

Need more insights on this? Contact our VAT consultants in Dubai for deeper knowledge.

VAT on Services in Designated Zones

Services supplied or received inside a Designated Zone are treated the same as services in the mainland UAE. VAT applies under normal rules.

If a business in a Designated Zone receives services from abroad, it must apply the reverse charge when required.

VAT on Goods: Understanding “Consumption”

This is the most important part of the VAT rules in Designated Zones. Goods supplied inside a Designated Zone are normally outside the scope of VAT, but this changes when goods are considered “consumed” in the zone.

The term “consumed” has a broad meaning. It includes:

• Any use
• Any handling that changes the goods
• Any form of application or exploitation
• Any situation where the goods no longer remains in its original form for resale or export

A few examples help clarify:

• If goods are bought only for resale and remain unchanged, VAT does not apply.
• If goods are used to produce another item that is later exported or moved, VAT may still not apply.
• If goods are used inside the zone and do not leave it, VAT applies.

Still muddled about something? Consult our VAT experts and get comprehensive VAT services in the UAE.

How Suppliers Confirm the Intended Use of Goods

The supplier must confirm whether the buyer will “consume” the goods inside the Designated Zone. To avoid mistakes, the FTA suggests that buyers provide a written statement confirming that the goods will not be consumed.

Without this written assurance, the supplier should charge VAT. This written confirmation protects the supplier if an audit takes place later.

When Goods Are Later Consumed or Lost in a Designated Zone

If goods were bought without VAT, the owner must monitor them closely. If the goods are later consumed, lost, moved to the mainland UAE, or shipped abroad, the correct VAT treatment must be applied.

If the goods enter the mainland, import VAT becomes due. If goods are lost or disposed of inside the zone, VAT may also apply. Records must be kept to show what happened to every item.

Moving Goods Into a Designated Zone

There are three key cases:

• Goods coming from outside the UAE

– This movement is treated as taking place outside the UAE for VAT. No VAT applies at this stage.

• Goods coming from the mainland UAE

– This movement is not treated as an export. It is treated as a normal local supply. VAT applies.

• Goods moving between two Designated Zones

– This movement can be outside VAT if:

• The goods are not used, changed, or released during the transfer.
• The transfer follows GCC Customs suspension rules.

The FTA may ask for a financial guarantee to cover VAT risk. VAT agents in Dubai can help you learn good movement to the designated zones without risks.

Import of Goods from a Designated Zone into the Mainland UAE

When goods move from a Designated Zone into the mainland UAE, they are treated as imports. Import VAT becomes due unless the movement is under Customs suspension.

There is a situation where VAT can be charged twice:

• VAT paid inside the Designated Zone on consumed goods
• VAT paid again at import into mainland UAE

The importer can fully recover the second VAT amount if records show that VAT was paid twice and the goods were not sold in between.

How can JCA (Jitendra Chartered Accountants) help?

Whether you conduct your business on the mainland, in a free zone, or in a designated zone, JCA will help you learn how UAE VAT will apply to your business and assist you in ensuring 100% VAT compliance in the UAE. For comprehensive VAT services in the UAE, consult our experts now!