Is VAT applicable for freezone company?

According to the UAE VAT Law, freezone companies must undergo VAT registration UAE on their taxable supplies. Both fenced and unfenced freezones are subject to standard UAE VAT rules as they are considered within the territorial scope of the UAE. Even the threshold for VAT registration remains the same - AED 375,000 for mandatory registration and AED 187,500 for voluntary VAT registration. However, there will be special VAT treatment for the 'Designated Zone' specified by the Cabinet Decision. This article helps you identify the designated zone, its VAT applicability, and the list of designated zone areas in UAE. 

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What is a Designated Freezone?

A Designated Zone is an area marked by a Cabinet Decision as a "Designated Zone." However, being labelled as such doesn't mean it's automatically considered outside the UAE for VAT purposes. Specific criteria must be fulfilled for a Designated zone to be considered outside the UAE for VAT purposes. Those criteria are as follows:

• It should be a specific fenced geographic area.
• It should have security measures and customs control to monitor the entry and exit of individuals and the movement of goods to and from the Designated Zone.
• It should have internal procedures to keep, store, and process the goods within the Designated Zone.
• The designated zone's zone should comply with the procedures fixed by the FTA (Federal Tax Authority).

List of Designated Freezones for VAT in UAE

Following are some of the Designated Freezone areas in UAE with appropriate details.

Also read: How to setup a company in UAE Freezones?

VAT Applicability on Designated Freezone

Understanding the Value-Added Tax (VAT) treatment for designated freezones in the UAE is crucial for businesses operating within these areas. In certain instances, these freezones are also treated as "offshore" for VAT purposes. Following are the special VAT treatments for supplies applicable to the Designated Freezone, 

• VAT applies to:
  • Supply of services within the designated zone: All services within a designated zone are subject to the 5% VAT, regardless of the recipient's location.
  • Supply of services from the mainland to the designated zone: These services also attract the 5% VAT.
  • Supply of water and energy: Even though considered goods, water and energy supplies within a designated zone are treated as services and taxed at 5%.
• VAT does not apply to:
  • Supply of goods between designated zones: The movement of goods between designated zones is considered internal supply and exempt from VAT.
  • Import of goods into the designated zone: These are not treated as imports for VAT purposes.

Note: Designated Zone businesses are considered 'onshore' in UAE for VAT purposes, generally. They must fulfil the same obligations as mainland businesses, including VAT registration, reporting, and compliance with standard rules. They can also join a tax group (VAT group) if they meet the requirements. The threshold for VAT registration is also the same as for mainland businesses. 

Conclusion

As mentioned, standard VAT rules are applied to both fenced and unfenced areas unless it fulfils the criteria to be termed a Designated Zone. We understood the special VAT treatment applicable to the designated zone and the list of designated freezones in UAE. As the VAT registration UAE process retains the same for designated zones as well, you can contact Filings.ae to do it. Filings.ae helps with your VAT registration from start to end and provides ongoing support.