FTA Guide on Designated Zone

The Federal Tax Authority has released a User Guide on Designated Zones which provides guidance to the taxpayers clarifying all the doubts regarding the characteristics of Free zone to be classified as a Designated Zone and VAT treatment of all the possible transactions within and from/to Designated Zones.

Following are the key points highlighted below:

  1. Free zones meeting the criteria specified in the Cabinet Decision shall be treated as Designated Zones and shall be accorded special treatment as laid out for Designated Zones in the UAE VAT Law. Where a Free zone is not a designated zone, it will be treated like any other part of UAE.
  2. Where a supply of goods is made within a Designated zone for consumption, VAT shall be applicable under the normal rules. As an exception to this rule, where the purchased goods are directly incorporated in the production of other goods (which itself is not consumed) and a direct nexus can be established then such a supply can be regarded as out of the scope of UAE VAT Law.
  3. The suppliers should not treat supplies of goods as being outside the scope of UAE VAT unless they are satisfied that there is no risk that the goods may be used by the purchaser for non-qualifying purposes. It may be noticed that FTA has instructed the suppliers to obtain a written statement from the recipient that the goods shall not be consumed.
  4. Supplies of real estate in a designated zone shall be regarded as out of scope from the purview of VAT. Raw materials purchased within a designated zone for the purpose of constructing real estate in the designated zone shall also be considered as out of scope.
  5. Supply of goods between tax group members resulting in the goods being moved from a designated zone to UAE mainland, the recipient shall account for VAT under Reverse charge Mechanism since the importation of goods shall trigger the obligation to pay import VAT as per the normal rules. The same treatment shall apply to branch(s) located in mainland and goods are moved from Head office in Designated Zone to such branch(s) in UAE mainland.
  6. In case where a registered person has incurred VAT on the purchase of goods within a Designated Zone and then again on the import of goods from Designated Zone to Mainland, the VAT registered person shall be able to recover VAT incurred on the importation of goods into the mainland in full on its tax return.
  7. It is pertinent to note that even if VAT is charged on the import of goods into UAE Mainland from Designated Zones, VAT may be charged again on the subsequent sale of goods within mainland where the date of supply is triggered on such sale. Application of VAT shall be dependent on the trigger of the date of supply in each transaction.