Understanding VAT Impact on Designated Zone Businesses
Business owners in the UAE often consider setting up in Designated Zones to gain tax benefits. A Designated Zone, which is a qualified Free Zone, lets companies save on taxes if they apply VAT rules correctly. The UAE VAT law treats a Designated Zone as outside the country for certain goods transactions, but not for services. VAT doesn’t apply to goods moving between Designated Zones if specific rules are met. Companies must stay up to date with the latest VAT guidelines to avoid errors and penalties.
What Is a Designated Zone? How Is It Different from a Free Zone?
The government calls some Free Zones “Designated Zones” when they meet certain VAT rules. If a Free Zone doesn’t meet these rules, it’s treated as part of the UAE for VAT. To benefit from Designated Zone VAT exemptions, you need to make sure your Free Zone has the right status.
To qualify as a Designated Zone, a Free Zone must:
- Be included in the official list on the FTA website
- Have a fenced physical space
- Have security and controls to monitor goods and people moving in and out
- Maintain internal controls for handling goods
- Meet FTA requirements at all times
Companies must always check if their zone remains on the qualified list.
Do Free Zone Companies Need VAT Registration?
Every business in a Free Zone or Designated Zone needs to register for VAT if taxable supplies in the UAE reach AED 375,000 per year. Companies may register voluntarily if supplies are above AED 187,500. Businesses must track their turnover and confirm their zone’s status before making VAT decisions.
VAT Treatment for Services Supplied in Designated Zones
Services supplied to or from a Designated Zone always fall under UAE VAT law, even if both companies are in the zone.
Example 1:
Company “A” in a Designated Zone buys internal audit services from company “B” in the same zone. VAT applies at the standard rate.
Example 2:
Company “X” in a Designated Zone provides consultancy to company “Y” in London. This export of service is taxed at zero rate.
VAT Treatment for Goods Supplied in a Designated Zone
VAT on goods in Designated Zones depends on end use:
- If goods are consumed within the zone (like stationery for office use), VAT is charged at the standard rate.
- If goods are bought for resale or to make another product that’s not consumed, VAT doesn’t apply.
Example 1:
Company “A” buys stationery from company “B” in the same Designated Zone for its admin work. VAT applies at standard rate.
Example 2:
Company “X” buys furniture from company “Y” in the zone to resell. No VAT is charged, as it’s not consumed.
VAT on Moving Goods Into a Designated Zone
VAT treatment depends on the source:
- Goods from outside UAE to a Designated Zone: Outside VAT scope, not taxable.
- Goods from UAE mainland to a Designated Zone: Standard VAT applies.
- Goods from one Designated Zone to another: Not taxable if all FTA/customs rules are followed.
VAT on Moving Goods Out of a Designated Zone
- Goods moved to UAE mainland from a Designated Zone are treated as imports. The importer must pay VAT.
Companies should check every transaction and consult with experts before making VAT decisions to stay on the right side of the law.
Key Points to Remember
- Always verify your Free Zone’s Designated Zone status.
- Register for VAT if your business passes the turnover threshold.
- Apply VAT to all services in or out of a Designated Zone.
- Charge VAT on goods only if they’re consumed in the zone.
- Document all transactions and confirm each party’s VAT obligations.
How Mubarak Al Ketbi (MAK) Auditing Helps Designated Zone Companies
Mubarak Al Ketbi (MAK) Auditing helps companies set up, operate, and stay VAT-compliant in UAE Designated Zones. The expert team provides:
- VAT registration and compliance checks
- Tax consultancy for goods and services
- Support for accounting, audit, and reporting
- Detailed analysis of each transaction’s VAT status
- Ongoing updates about VAT rule changes
- Customized solutions for your business needs
How Mubarak Al Ketbi (MAK) Auditing Can Help You
If you want to keep your finances shipshape, you should work with Mubarak Al Ketbi (MAK) Auditing for all your VAT needs in UAE Designated Zones.
- Get expert VAT registration and compliance help
- Receive advice for goods and service transactions
- Access ongoing support for reports and audits
- Avoid penalties by following the law
- Book a free one-hour consultation now
For more information:
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact/WhatsApp: +971 50 276 2132
