A Designated Zone is an area specified by a Cabinet Decision as being a “Designated Zone”. It can also be said that, a Designated Zone is a VAT free Zone which is considered to be outside the State of UAE for the purpose of VAT.
Although an area might be identified as a Designated Zone, it is not automatically treated as being outside the UAE for VAT purposes. There are several main criteria which must be met in order for a Designated Zone to be treated as outside the UAE for VAT purposes. These are as follows:
- The Designated Zone must be a specific fenced geographic area.
- The Designated Zone must have security measures and Customs controls in place to monitor the entry and exit of individuals and movement of goods to and from the Designated Zone.
- The Designated Zone must have internal procedures regarding the method of keeping, storing and processing of goods within the Designated Zone.
- The operator of the Designated Zone must comply with the procedures set out by the FTA.
Note: When a Designated Zone meets all the above tests, it can be treated as outside the UAE for VAT purposes.
Tax treatment on the Outward supplies (sales) of a Designated Zone Company:
| Nature of Supply | Nature of transaction | VAT applicability |
|
Supply of Services |
Designated Zone to Designated Zone | VAT @ 5% |
| Designated Zone to Mainland | VAT @ 5% | |
| Designated Zone to outside UAE | VAT @ 0% | |
|
Supply of Goods |
Designated Zone to Designated Zone | Out of scope * |
| Designated Zone to Mainland | VAT @ 5% (RCM) ** | |
| Designated Zone to outside UAE | Out of scope *** |
* If goods are used for own consumption, then VAT @5% (RCM) will be applicable.
** If the supply is to a non-registered person then VAT @ 5% is charged.
*** Out of scope means, outside the purview of UAE VAT law.
Tax treatment on the Inward supplies (purchase) of a Designated Zone Company:
| Nature of Supply | Nature of transaction | VAT applicability |
|
Supply of Services |
Designated Zone to Designated Zone | VAT @ 5% |
| Designated Zone to Mainland | VAT @ 5% | |
| Designated Zone to outside UAE | VAT @ 5% (RCM) | |
|
Supply of Goods |
Designated Zone to Designated Zone | Out of scope * |
| Designated Zone to Mainland | VAT @ 5% | |
| Designated Zone to outside UAE | Out of scope ** |
* If goods are used for own consumption, then VAT @5% (RCM) will be applicable.
** Out of scope means, outside the purview of UAE VAT law.
Specific cases: Supplies of water and energy
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