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Many people come to the UAE to set up a business and ensure it’s handled in the most tax-efficient way possible.
The UAE has several types of Zones throughout the country, all of which have their own rules and regulations. But, to the outsider, this can be complex and difficult to understand, especially laws regarding taxes such as VAT.
This article helps navigate the maze by explaining what a Designated Zone is, so you can decide if it is the right place to base your business. It includes these topics:
• Designated Zones in the UAE – what are they?
• How to identify a designated zone in the UAE
• Locations of designated zones in the UAE
• Supply of services within UAE designated zones
• Supply of goods within UAE designated zones
• How is VAT treated for the supply of goods within designated zones?
• How is VAT treated when goods are imported from designated zones to the mainland?
• VAT recovery in UAE designated zones
• How Creative Zone can help
This is quite a complex area, but the key detail is VAT. In the UAE, VAT is levied on goods and services. The trading areas known as Free Zones are not classed as UAE territory – but this does not mean that businesses there are exempt from paying VAT.
Only companies selling goods and services in Free Zones that have been listed in a cabinet decision – known as Designated Zones – are exempt from paying VAT, (although some exceptions exist). In VAT terms, Designated Zones are not classed as UAE territory.
Free Zones that meet the criteria and regulations necessary to become a Designated Zone, and which are listed in a cabinet decision, must still follow certain rules to maintain their status as ones.
These rules are quite strict. For instance, the Zone must be fenced and has to employ its own security and a customs control unit, which monitors people and goods coming in and out of the Zone. The Zone must also have clear rules on how goods are stored, retrieved and processed.
The Zone operator must adhere to all regulations imposed by the FTA, while companies based in the Zone are bound by stringent rules and have to retain thorough business records.
There are numerous Designated Zones in the UAE, situated in Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah. The full list of Designated Zones was confirmed in Cabinet Decision no.59.
Designated Zones are generally exempt from VAT, but not always. For instance, with services, the regulations say that if they are supplied from a Designated Zone, then business is regarded as taking place in the UAE and is therefore eligible for VAT – and this covers most services.
However, if the service is provided to someone who doesn’t live within the GCC states, it is not subject to VAT.
Meanwhile, products delivered within a Designated Zone are exempt from VAT because the Zone is ruled as not being in the UAE. But, again, there are exemptions to this. For example, if the goods are supplied to a person who plans to use them for private matters, the business is ruled to be within the UAE and therefore comes under normal VAT rules.
However, if whoever buys the goods wants to resell them or make other goods with them, the initial supply is ruled as VAT-exempt. But the goods made from items that have been bought must be directly connected if the business is to be exempt from VAT.
For instance, if wood is purchased for making furniture, it is ruled as exempt from VAT. However, if a laptop is bought to design another product, it is subject to VAT as it isn’t directly connected to the final product.
Any products sold by a business in a Designated Zone to a company in a separate Designated Zone are not subject to VAT. This is only the case, however, if the products are not used or modified in any way by the purchaser and are moved while adhering to the customs suspension rules found in the GCC Common Customs Law.
In addition, the buyer may have to provide a guarantee for the VAT cost if these stipulations are not followed.
If goods produced in a Designated Zone are sold to a business on the UAE’s mainland, they are regarded as being imported and are therefore eligible for import VAT.
However, if the products were subject to VAT when bought from the business in the Designated Zone and then again when imported to the purchaser’s location on the mainland, the importer can recover the latter charge. The importer can recover all the VAT charged if the products they import back to their location remain as they were in the Designated Zone.
If the purchaser then sells the products in their local mainland area, they can also be charged VAT, even if the seller had to pay import VAT. The level of VAT is determined by when the sale occurs.
In addition, there are situations where companies registered in a Designated Zone can claim back the VAT on supplies made in those Zones.
For instance, those businesses that make products that are VAT chargeable – or would be if they were made in another zone – can recover the VAT they were charged on those products.
But input VAT cannot be reclaimed if the products the business produces are not subject to VAT.
Alternatively, if some of a company’s supplies are VAT chargeable while others are exempt, any VAT paid can be split into two – recoverable and non-recoverable.
As this article shows, the rules around Designated Zones and VAT regulations are quite complex, especially for those who have not dealt with the system before. Therefore, it is advisable to seek help from experts who can help entrepreneurs to deal with the system quickly and accurately.
Creative Zone is an expert in Designated Zones and their VAT rules, and we can help businesses negotiate them. Creative Zone is also well-versed in such things as business setup in Dubai and can assist with all aspects of the business start-up process and ensure the process is as stress-free as possible.
To find out more and receive a bespoke quote, contact Creative Zone: www.creativezone.ae/contact-us/
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