VAT Guide – Designated Zone
Identification of a Designated Zone
A Designated Zone is an area specified by a Cabinet Decision as being a “Designated Zone”.
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:
1. The Designated Zone must be a specific fenced geographic area.
2. 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.
3. The Designated Zone must have internal procedures regarding the method of keeping, storing and processing of goods within the Designated Zone.
4. The operator of the Designated Zone must comply with the procedures set out by the FTA.
Supply of services
The place of supply of services is considered to be within the UAE if, under the normal rules, the place of supply would be the Designated Zone. This means that most services will be liable to VAT at the standard rate, as would be the case were they performed within the UAE.
Supply of goods within a Designated Zone
A supply of goods within a Designated Zone is treated as made outside the UAE. This means that the default position is that such supplies are not subject to UAE VAT.
Override of the default rule
This default position is overridden where a supply of goods is made within a Designated Zone to a person to be consumed by him or another person – in these situations, the place of supply will be treated in the UAE and VAT will be applicable under the normal rules.
The term “consumed” should be interpreted broadly as including any utilisation, application, employment, deployment or exploitation of the goods.
For the purpose of the provision, the resale of purchased goods is not treated as consumption of the goods. Therefore, a supply of goods in such circumstances would still be outside the scope of VAT if the purchaser intends to sell them.
Furthermore, it should be noted that the override does not apply, and the supply can still be treated as being outside the scope of VAT, when the purchased goods are:
- incorporated into, attached to or otherwise form part of another good located in the same Designated Zone and that other good is not consumed; or
- used in the production of another good located in the same Designated Zone and that other good is not consumed.
For the purposes of the second exception to the override, there must be a direct connection between the purchased goods and the production of another good. For example, the exception will generally apply to tools and equipment used to manufacture other goods; in contrast, a computer used by the business to create designs for goods which are later manufactured will not have sufficient connection with the goods to be treated as “used in the production” of the goods.
Transfers of goods into a Designated Zone
Transfers from outside the UAE
Since Designated Zones are treated as outside the UAE for VAT purposes, a movement or supply of goods into a Designated Zone from outside the UAE would be treated as taking place outside the UAE. Therefore, no UAE VAT would be charged on such movement or supply.
Transfers from mainland UAE
A movement of own goods, or a supply, from mainland UAE to a Designated Zone is not considered to be an export of goods from the UAE. Therefore, such movements and supplies are treated as local movements/supplies.
Transfers between Designated Zones
A transfer of goods (that is, either a sale or movement of own goods) between two Designated Zones will be treated as outside the scope of VAT subject to the following two conditions being met:
1. the goods, either in part or in their entirety are not released into circulation, nor used or altered in any way during the transfer between the Designated Zones; and
2. the transfer for the goods is undertaken in accordance with the rules for Customs suspension per the GCC Common Customs Law.
Import of goods from Designated Zones
A movement of goods from a Designated Zone into the mainland UAE is treated as an import of goods into the UAE. Therefore, import VAT is payable by the importer of the goods.
Supplies of water and energy
Supplies of water or any form of energy are supplies of goods. Therefore, similar to supplies of other goods within Designated Zones, such supplies may be treated as being outside the scope of the UAE if they meet conditions.
However, where water or energy is supplied for consumption (e.g., water and electricity provided by a water and electricity authority), then the place of supply of such water and energy reverts to being treated as being within the UAE and the supply is subject to the normal VAT treatment.
Supplies of real estate
Supplies of real estate, which include the sale and lease of real estate, are treated as supplies of goods. The place of supply of such supplies is where the real estate is located.
It should be noted that real estate is not treated as consumed when sold or leased within a Designated Zone and therefore such supplies of real estate are outside the scope of VAT.
Raw materials purchased within a Designated Zone for the purpose of constructing real estate in the Designated Zone are also outside the scope of VAT. This is because the raw materials will be used in the production of another good (the real estate) located in the same Designated Zone which itself is not consumed.