Designated Zones are areas identified by the UAE Cabinet as eligible for special treatment under the UAE VAT law. A Designated Zone must be a specific fenced area, in addition to meeting all of the following requirements:
- It must adhere to strict control criteria laid out by the government.
- The operator must keep detailed records of goods supplied.
- Security and customs procedures must have been implemented to control the movement of goods and people within the designated zone.
- Internal procedures should be followed related to keeping, storing and processing of goods within the area.
- The operator of a Designated Zone must adhere to the procedures set out by the FTA.
If a Designated Zone changes the way it operates, or does not meet any of the criteria mentioned above, then it will be considered a part of the UAE for VAT purposes. A Free Zone (fenced or unfenced) that does not qualify as a Designated Zone will not receive special VAT treatment.
Certain goods supplied within the Designated Zones are not subject to VAT which is:
- Goods that are incorporated into, attached to, or a part of another good that is not consumed and is located in the Designated Zone
- Goods that are used to produce another good, which is not consumed, if both of these goods are located in the Designated Zone. For example, the purchase of tools and equipment used to manufacture other goods will not be subject to VAT, if both are located in the Designated Zone. If the goods are supplied within a Designated Zone, then the place of supply is considered to be ‘offshore’ or outside of the UAE. Therefore, the goods supplied will not be subject to VAT. In most cases, the authorities expect a written declaration from the buyer that the purchased goods will not be used for purposes that will make the sale fall under the purview of VAT. If the goods are supplied to a person who will be consuming them, then the place of supply will be the UAE and VAT will be applicable under normal rules. If a person purchases the goods with an intention to resell or manufacture any other product using these goods as the main component, then the supply will not be subject to VAT.
For supplies of services, the VAT treatment in the Designated Zones is the same as in the rest of the UAE. If the services are supplied within a Designated Zone, then the place of supply is considered to be the UAE. Therefore all supplies of services are subject to normal VAT rules.
Treatment in the following situations under VAT:
- Supply to a Designated Zone from outside UAE or from mainland UAE.
- If a supply is made to a Designated Zone from outside the UAE, then the supply is considered to be made outside the UAE. Therefore, VAT will not be applicable on such supplies.
- If the supply is made from mainland UAE to a Designated Zone, then the supply will not be considered an export of goods from the UAE. It will be treated as a local supply.
- Supply of own goods between two Designated Zones: The supply, sale, or movement of own goods will be considered to be outside the scope of VAT only if both of the following conditions are met: (1) The goods transferred are not partly or entirely meant to be circulated, used, or altered in any manner during the transfer. (2) The transfer of goods is made as per the rules for customs suspension set by the GCC Common Customs Law.
- Supply of goods from a Designated Zone to the mainland UAE: It is considered to be import of goods into the UAE and import VAT must be paid by the importer.