VAT on Designated Zone in UAE

By | August 29, 2023

A Designated Zone is an area specified by the cabinet decision that fulfills the conditions outlined in the UAE Executive Regulation. Authorities consider it a VAT-free Zone and treat it outside the State of UAE for VAT purposes. Consequently, VAT will not be levied on any transfer of goods between Designated Zones.

Company Formation in Dubai

This article will categorically discuss the treatment of supplies made From or To Designated Zones.

Supply of goods from 

  • a Designated Zone to another Designated Zone
  • Designated Zones to the Mainland
  • the Mainland to Designated Zones
  • Designated Zone to overseas/GCC countries
  • overseas/GCC countries to Designated Zone
  • Supply of services within Designated Zones
  • Other exceptional supplies, such as Water, any energy forms, self-consumption of goods in Designated Zones, etc.

VAT treatment on the supply of Goods related to Designated Zones

The authorities do not subject Designated Zones to VAT. They consider them outside the State of the United Arab Emirates, as stated before. Not all suppliers will benefit from this advantage, even if they are outside the State. Some suppliers will still be liable for 5% VAT. Only the supply of items will be tax-free in certain circumstances, as only a few categories of supplies made from or to the Designated Zone will be taxed. The table below details the VAT payable to supplies coming from or going to Designated Zones.

Type of SuppliesFromToTaxability
GoodsDesignated ZoneDesignated ZoneNon-Taxable
GoodsDesignated ZoneMainland*Taxable at 5% VAT
GoodsMainland*Designated ZoneTaxable at 5% VAT
GoodsDesignated ZoneOversea/GCC countriesNon-Taxable
GoodsOversea/GCC countriesDesignated ZoneNon-Taxable

As shown in the above table, if the requirements outlined in the UAE Executive Regulations are satisfied, any transfer of products from one Designated Zone to another will not be subject to tax.


VAT Calculator

VAT exemption conditions for the supply of goods between Designated Zones:

To qualify for VAT exemption on supplies between Designated Zones, you must meet the following conditions:

  • During transfer between the Designated Zones, you must not release goods.
  • You cannot use or modify the goods between the Designated Zones during transportation.
  • The transfer of goods must comply with the rules for customs suspension under the GCC Common Customs Law.

In addition to the above conditions, the authority may request a financial guarantee for tax payment from the owner of goods. It happens if they need to meet the movement requirements.

VAT Treatment on Supply of Services Related to Designated Zones:

While goods from Designated Zones are VAT-free, the same applies to services. If the place of supply is within the Designated Zone, it is subject to the standard 5% VAT rate. It applies to services supplied from the mainland to Designated Zones or within the Designated Zone.

VAT Treatment on Supply of Water or Energy to Designated Zones:

While water and energy supplies are classified as goods, their treatment in Designated Zones differs. Suppose the place of supply of water or energy is within a Designated Zone. In that case, authorities consider it inside the State, and VAT at 5% applies, similar to non-Designated Zone areas in the UAE.

Corporate TAX UAE

Self-Consumption of Goods in Designated Zones:

If the owner or a third person uses goods supplied within a Designated Zone, authorities consider the place of supply within the State of UAE, making it subject to 5% VAT. The consumption of goods within a Designated Zone shall not be subject to VAT in some limited, exceptional circumstances, such as 

  • When goods are incorporated into other goods
  • attached to other goods
  • form part of other goods
  • Or businesses within the same Designated Zone use goods to produce or sell another product.

Select Product for Free Demo

    Goods with a Designated Zone location that do not have VAT applied

    If the owner has not paid VAT on items in a Designated Zone, the authorities will regard their consumption as an import. If the VAT remains unaccounted for, the owner will be liable to pay the VAT. However, if the owner uses these commodities for self-consumption in the instances mentioned above, VAT will not apply.

    EmirateDesignated Zone
    Abu DhabiFree Trade Zone of Khalifa Port
    Abu Dhabi Airport Free Zone
    Khalifa Industrial Zone
    DubaiJebel Ali Free Zone (North-South)
    Dubai Cars and Automotive Zone (DUCAMZ)
    Dubai Textile City
    Free Zone Area in Al Quoz
    Free Zone Area in Al Qusais
    Dubai Aviation City
    Dubai Airport Free Zone
    SharjahHamriyah Free Zone
    Sharjah Airport International Free Zone
    AjmanAjman Free Zone
    Umm Al QuwainUmm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
    Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
    Ras Al KhaimahRAK Free Trade Zone
    RAK Maritime City Free Zone
    RAK Airport Free Zone
    FujairahFujairah Free Zone
    FOIZ (Fujairah Oil Industry Zone)

    Wrapping Up

    It is obvious that depending on the nature of the supply, different supplies associated with Designated Zones receive varying VAT treatment. First, only limited circumstances allow for the benefit of VAT exemption, and services provided within the Designated Zone are subject to tax. Second, to qualify for a VAT exemption on the supply of goods within Designated Zones, businesses must complete the requirements outlined in UAE Executive Regulations. Therefore, companies must comprehend how VAT applies to their supplies, gauge how VAT will affect their operations, and make the necessary plans.