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In the UAE, VAT is applicable all over the country, except for designated free zones, a specific area assigned to be outside the UAE for Value Added Tax (VAT) purposes.
What are Free zones in the UAE?
Free zones are geographic areas with security measures in place to watch the movement of goods and people. The transfer of goods between the designated zones is tax-free.
The designated zones are not considered inside of the UAE for VAT purposes. Therefore, VAT generally does not apply in the designated zones.
There are around 23 designated free zones all across the UAE.
The VAT Guide on Designated Zones published by the Federal Tax Authority on 29 July 2018 explains a Free Zone’s specific characteristics and how it can be distinguished as a Designated Zone for VAT purposes.
FTA’s new amendment
The FTA, on October 30th, 2022, announced an amendment to Article 51 of Cabinet Decision No. (52) of 2017.
According to the amendment, tax registrants are permitted to avoid VAT double taxation for the supply of goods in designated zones.
The clarifications to the amendment are available on the authority’s website by FTA. This will raise tax awareness among business sectors and ensure the best tax compliance.
As per the document,the supply of goods in the Designated Zone must be transacted outside the scope of UAE VAT, if the goods are not consumed inside the country, or in case the goods are consumed outside the Designated Zone.
The shipping and delivery services of Qualifying Goods are also outside the scope of UAE VAT if they are supplied by the same supplier of the goods, under certain conditions, including the supplier is a non-resident who is not registered for VAT in the UAE.
Objective
The new amendment was set with the following objectives:
- With the aim to keep tax-registered businesses functioning in the designated zones from paying VAT twice.
- The purpose behind the amendment is to avoid VAT Double Taxation on supplied goods in the Designated Zone.
- To simplify procedures to support non-resident suppliers operating in the Designated Zones, as these supplies will be regarded – under specific conditions – outside the scope of tax, that being the case, the supplier is not obligated to tax register their business.
Transfer of Goods in Designated Free Zones
Goods may also be moved between designated zones without being subject to tax, provided the goods being transferred are not consumed or altered throughout the journey and the transfer is performed in accordance with the rules for customs suspension per GCC Common Customs Law.
If the conditions for the transfer between designated zones are not met, the FTA may ask for a guarantee equivalent to the tax liability of the goods to be transferred. Movement or supply of goods into a designated zone from inside the UAE will not be treated as an export of the goods, and will not receive the same zero rating like exports outside the GCC.
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