Do Free Zone companies in UAE pay VAT?

Yes, Free Zone companies pay VAT unless transactions occur between two Designated Zones without alteration of goods.

What is a Designated Zone under UAE VAT law?

A Designated Zone is a Free Zone treated as outside UAE for VAT purposes if conditions of customs suspension are met.

How does VAT apply when a Free Zone company sells to mainland?

If a Free Zone firm sells to mainland, VAT applies under Reverse Charge Mechanism. The mainland company records it as a purchase.

Can a Free Zone company recover input VAT?

Yes, Free Zone companies can recover input VAT on eligible expenses when filing VAT returns.

Why should Free Zone firms hire Mubarak Al Ketbi (MAK) Auditing?

We offer expert VAT guidance, accurate compliance, and timely support for Free Zone businesses, ensuring they avoid penalties and maximize benefits.

Impact of VAT on UAE Free Zone Companies 🥇

Introduction

UAE Free Zones attract global investors with tax incentives and 100% foreign ownership. Each Free Zone supports business growth through simplified rules, no corporate tax, and complete repatriation of profits. Companies in these Free Zones must follow the licensing requirements of their respective authorities.

Since 1st January 2018, VAT applies to most goods and services across UAE. However, Designated Free Zones receive special VAT treatments. Businesses in Dubai, Abu Dhabi, Sharjah, Fujairah, Ajman, Ras Al Khaimah, and Umm Al Quwain Free Zones must understand VAT rules to avoid penalties and remain compliant.

Key Benefits of UAE Free Zones

Free Zones allow foreign investors to operate businesses with attractive incentives. Some main benefits are:

100% foreign ownership
Full repatriation of capital and profits
100% exemption from import and export taxes
No corporate or personal tax

For instance, if a company in Jebel Ali Free Zone supplies goods to a firm in Dubai Airport Free Zone, the supply remains VAT-free since both areas are Designated Zones.

Free Zone Company Structures

Every Free Zone is managed by its own authority with specific rules. Companies can form in three ways:

Free Zone Establishment (FZE): A single shareholder company
Free Zone Company (FZC): Two or more shareholders
Branch of a Foreign Company: Similar to an onshore branch without a local service agent requirement

This flexibility allows investors to choose the right setup based on their needs.

VAT Implications for Free Zones

1. Transfer of Goods Between Designated Zones

Transfer of goods between two Designated Zones is not subject to VAT.
This exemption applies if goods are not altered during the transfer and if rules of customs suspension are followed.

2. Import of Goods Into Designated Zones

Import of goods into a Designated Zone is treated as outside the scope of VAT.
The place of supply is considered the Free Zone itself, not the UAE mainland.

3. Sale from Designated Zone to Mainland

Scenario 1: Goods Imported by Mainland Company

If a Designated Zone company sells goods, and the Mainland company imports them, it becomes subject to Reverse Charge Mechanism (RCM).

Scenario 2: Goods Imported by Designated Zone Company

If the Designated Zone company imports goods into UAE, it becomes liable for VAT under RCM.
The Mainland company records this as a purchase and can claim input tax.

4. Sale from Mainland to Designated Zone

Goods moved from mainland UAE to a Designated Zone are not treated as exports.
The Designated Zone company records this as a domestic purchase and can claim input tax.

Practical Example of VAT in Free Zones

Suppose a supplier in Dubai Free Zone transfers products to a buyer in Abu Dhabi Free Zone. If the goods remain unaltered, VAT doesn’t apply. But, if those goods are later supplied to a mainland UAE business, VAT applies under reverse charge.

This example shows why proper VAT compliance is essential.

Challenges of VAT Compliance in Free Zones

Free Zone companies face multiple issues when applying VAT rules:

Identifying Designated Zone vs Non-Designated Zone status
Applying Reverse Charge Mechanism correctly
Managing cross-border VAT transactions
Preparing accurate VAT filings under Federal Tax Authority (FTA)

To overcome these challenges, Free Zone companies must work with skilled auditors and VAT experts.

Role of Mubarak Al Ketbi (MAK) Auditing in VAT Services

Mubarak Al Ketbi (MAK) Auditing provides professional VAT consultancy for Free Zone companies. Our experts ensure compliance with UAE VAT laws and offer tailored solutions for Free Zone firms.

We assist companies with:

VAT registration and compliance
VAT return filing
VAT audit and reporting
Reverse Charge Mechanism guidance
Accounting and bookkeeping for Free Zone entities

Our team applies knowledge of UAE tax laws to support companies with accurate reporting and cost-effective strategies.

What Can Help

Mubarak Al Ketbi (MAK) Auditing helps Free Zone companies stay compliant with UAE VAT law. Our services ensure efficiency, compliance, and growth. Remember, “The ball is in your court”—choosing the right VAT consultant can make or break your success.

📍 For more information:

Visit: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
Contact/WhatsApp: +971 50 276 2132

FAQs Impact of VAT on UAE Free Zone Companies 🥇

How does corporate tax help a start-up’s growth?

Corporate tax teaches start-ups to keep better records, plan smartly, and look more trustworthy, which can help them get more investments.

Are there any special tax breaks for new tech companies in the UAE?

Yes, tech companies can get tax holidays, pay zero tax on profits below a certain level, and keep special rates in some Free Zones.

Why is corporate tax good for fair business?

Corporate tax makes sure every business pays its part, so big firms can't get ahead by skipping taxes. This creates a level playing field for start-ups and supports public services.