What’s a Designated Zone & How Does It Affect VAT?
Companies in the UAE often set up legal business entities in Designated Zones, also called qualified Free Zones. When a company operates in a Designated Zone, it must follow special VAT rules. Many people don’t fully understand how VAT applies to business transactions in these zones, and it’s common for companies to make mistakes. To stay compliant, you should always check the latest VAT laws and get expert advice before you set your tax practices.
How Do You Identify Goods Supplied Within a Designated Zone?
The place of supply decides if a transaction falls under Designated Zone rules. The law uses the location of the goods to identify the supply. Here are some examples:
- A restaurant in a Designated Zone sells food to customers inside the zone.
- A stationery shop sells office supplies to walk-in buyers within the zone.
- A furniture shop in a Designated Zone sells furniture to a company in the same zone.
- A trading company sells goods to a manufacturing company, with both firms in the same zone.
Each example shows goods supplied inside the Designated Zone, so the VAT rules for that zone apply.
What’s the Default VAT Rule for Goods Supplied in a Designated Zone?
According to UAE VAT law, a Designated Zone is treated as outside the UAE for VAT purposes—if it meets certain conditions set by the regulation. By default, goods supplied within a Designated Zone are out of the scope of UAE VAT, just like exports. Companies in Free Zones must check if their zone truly qualifies as a Designated Zone before applying this rule.
When Does the Default Rule Get Overridden?
Sometimes, the default rule does not apply. If the goods supplied are consumed by the recipient inside the Designated Zone, then the transaction falls inside the UAE VAT system. The supplier must charge VAT at the standard rate.
Example:
A stationery shop in a Designated Zone sells paper to a consulting company next door. If the consulting firm uses the paper for its work, that’s “consumption.” The stationery shop must add VAT to the invoice.
What Are the Exemptions to the Override Rule?
There are two cases where the law does not count the transaction as “consumed,” so it remains out of VAT scope:
- The goods are used to make another product in the same Designated Zone, and the new product isn’t consumed.
- The goods are part of a manufacturing process in the same zone, directly linked to the end product, and that product isn’t consumed.
If either case applies, the default rule holds and no VAT is charged.
Who Decides the VAT Treatment in a Designated Zone?
The supplier always decides and applies the VAT treatment. Suppliers must:
- Know how their customers will use the goods.
- Classify each transaction as either inside or outside UAE VAT.
- Ask for a written statement from customers if they’re unsure about the intended use.
Correct classification is the supplier’s responsibility.
Key Points for VAT on Designated Zone Goods
- Always verify if your zone is a true Designated Zone.
- Check the customer’s intended use of the goods.
- Apply standard VAT only if goods are consumed in the zone.
- Document every transaction and keep customer statements as proof.
Getting these steps right will help you avoid VAT errors and penalties.
How Mubarak Al Ketbi (MAK) Auditing Helps with Designated Zone VAT
Mubarak Al Ketbi (MAK) Auditing has an expert team to support your business with every VAT issue in Designated Zones. The firm can:
- Clarify your questions on company setup and VAT registration.
- Guide you to apply the correct VAT treatments for all goods supplied.
- Analyze your business transactions case-by-case.
- Review your accounting to make sure you use correct tax mapping.
- Help with management reports, internal controls, and regulatory compliance.
- Give industry-specific advice and practical solutions.
How Mubarak Al Ketbi (MAK) Auditing Can Help You
If you want to keep your VAT sorted and sleep like a log at night, you should let Mubarak Al Ketbi (MAK) Auditing handle your Designated Zone compliance. Their team can support every step of the VAT process for your UAE business.
- Get expert advice on VAT registration and treatments
- Ensure all Designated Zone transactions are compliant
- Receive practical help with reports and controls
- Avoid penalties with correct tax mapping
- Book a free one-hour consultation today
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
