DESIGNATED ZONE VAT GUIDE
The Federal Tax Authority had issued a Designated Zone VAT guide known as VATGDZ1 for the key stakeholders in business who operate in Designated Zone and are responsible for tax matters. It aims to provide more detailed guidance about the characteristics of a free zone which must be present to qualify as a Designated Zone and assistance to businesses operating in these zones.
IDENTIFICATION OF DESIGNATED ZONES
VAT TREATMENT OF FREE ZONES
Fenced as well as unfenced free zones lie within the territorial scope of the UAE and are subject to the normal UAE VAT rules. Free Zones specifically identified by way of Cabinet Decisions as Designated Zones do not lie within UAE’s territorial scope.
CONDITIONS TO BE FULFILLED FOR TREATING AN AREA AS DESIGNATED ZONE
Irrespective of the fact that an area is identified as a Designated Zone, it is considered to be outside the UAE for VAT purposes if it meets the following conditions :
- The Designated Zone must be a specified fenced geographic area having security measures to monitor the entry and exit as well as movement of goods to and from the Designated Zone.
- The operator of the zone must comply with the procedures set out by the FTA and should have internal procedures for keeping, storing and processing the goods within the designated zones.
A designated zone will be considered as being outside the UAE only to the extent of that area which meets the requirements mentioned above. A designated zone which changes its manner of operation or no longer meets the requirement falls within UAE’s territory.
ENTITIES WITHIN A DESIGNATED ZONE
Businesses which are established, registered or have a place of residence within the designated zone are deemed to have a place of residence in the UAE for VAT purposes. A business which operates in a Designated Zone will be onshore for VAT purposes irrespective of the fact that some of its supplies are outside VAT’s scope.
Any person carrying business activity in the UAE or making supplies in excess of the mandatory registration threshold is required to apply for VAT registration. Any other person making taxable supplies or incurring expenses in excess of the voluntary VAT registration threshold is also under a mandate to register for VAT purposes.
CONSEQUENCES OF TREATING DESIGNATED ZONES AS BEING OUTSIDE THE UAE FOR VARIOUS TYPES OF TRANSACTIONS
The place of supply of services is within the UAE if the place of supply is Designated Zone. Most of the services are liable to VAT at a standard rate in such a manner that they’re performed within the UAE. Services are zero-rated if it is exported to a resident or to a place located outside the GCC implementing state.
SUPPLY OF GOODS WITHIN THE DESIGNATED ZONE
DEFAULT RULE: Supply of goods within a designated zone is not subject to VAT as it is made outside the UAE.
EXCEPTIONS TO THE DEFAULT RULE
- Supplying goods within a Designated Zone to a person for his personal consumption or consumption by any other person will attract VAT at the place of supply will be UAE. The supply will be outside the scope of VAT when the goods purchased are either :
- Incorporated, attached or otherwise form a part of other goods located in the same designated zone
- Are used in the production of another good located in the same designated zone and that other good is not consumed
2. A direct connection must exist between the purchased good and the production of other good
TRANSFER OF GOODS INTO A DESIGNATED ZONE
- TRANSFER FROM OUTSIDE THE UAE
Movement or supply of goods into a designated zone from outside the UAE will be considered as taking place outside the UAE. The VAT will not be applicable to such transfer.
2. TRANSFER FROM UAE MAINLAND
Movement or supply of own goods from UAE mainland to a Designated Zone does not fall under export of goods from the UAE.These supplies and movements are local movement/supplies.
3. TRANSFERS BETWEEN DESIGNATED ZONES
Subject to the following conditions, transfer of goods between 2 designated zones are outside VAT’s scope :
- The goods are either in part or in their entirety are neither released into circulation nor used or altered in any way during such transfer
- The transfer takes place as per the Rules for Customs suspension as per GCC Customs Law
IMPORT OF GOODS FROM DESIGNATED ZONE
Importer importing goods from a designated zone into the UAE mainland is under a mandate to pay import VAT. The VAT registered persons can recover VAT on importation of goods into the UAE mainland if he incurs VAT on the purchase of goods within a Designated Zone and then again while importing goods from the designated zone into the UAE mainland.
SUPPLIES FOLLOWING IMPORTATION
The VAT is charged again on the subsequent sale of goods within the mainland irrespective of the fact that VAT was charged on the import of goods into the UAE mainland from the designated zone.
SUBSEQUENT CONSUMPTION OR LOSS OF GOOD
Goods located in a Designated Zone on which no VAT is paid by the owner are treated as imported into the UAE in the following cases :
- The goods are consumed by the owner unless they are incorporated, attached or form a part of or are used for producing other goods located in the designated zone
- The goods are unaccounted for