UAE Free Zone Companies are not Tax-Free
Many investors and business owners prefer to do business in the UAE because of its tax-free regime (though not entirely!). Many businesses have inquired about VAT on free zones since the release of the UAE VAT Law Framework. This emphasizes the significance of the VAT framework. The UAE free zone companies want to know how existing free zones are treated under the current tax regime.
In other words, how will supplies to or from UAE Free Zone companies be taxed? Are Free Zone Companies exempt from paying taxes?
Before we discuss VAT treatment for UAE Free Zones, it is helpful to understand what a Free Zone is.
What Is a UAE Free Zone?
A Free Zone is a special area in the UAE for the promotion of international businesses with 100 percent foreign ownership. Companies benefit from operating in Free Zones because they do not require UAE-resident partners or shareholders. In the UAE, free zone companies are exempt from duties and taxes such as Corporate Income Tax, Personal Income Tax, all import and export duties, and so on. To conduct business in a Free Zone, UAE companies must obtain licenses and follow the regulations of the Free Zone authorities.
Free Zones Are Not The Same As VAT Free Zones
Many considerations must be made by businesses, beginning with the fact that ‘All Free Zones’ may not necessarily be ‘VAT Free Zones.’ These definitions and provisions are clearly laid out in the UAE VAT Law and Executive Regulations. These Designated Zones must abide by Cabinet Decision No. 59 of 2017 on Designated Zones for the purposes of Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT). The executive regulation establishes the conditions for the operation of a VAT Free Zone. VAT-free zones are referred to as ‘Designated Zones’ in the UAE.
A designated zone is defined by the Executive Regulation as a specific area that meets the conditions specified by a cabinet decision. The 5% VAT will not apply to supplies made between VAT-designated zones. A Designated Zone also serves as an outside state for VAT purposes. To be eligible, you must meet the following requirements:
A boundary should be established around the geographical area.
It should have security measures and customs controls in place to monitor individual entry and exit as well as the movement of goods into and out of the area.
It must have internal procedures for keeping, storing, and processing goods within the Designated Zone.
The operator of the Designated Zone must follow the Authority’s procedures.
According to Article 51 of Cabinet Decision no 52 of 2017, if the Designated Zone changes how it operates or fails to meet any of the conditions imposed on it prior to its designation as a Designated Zone under the Cabinet Decision, the zone will be treated as if it were part of the State.
VAT Obligations in a Designated Zone
Because the premises are within the UAE, business establishments within a Designated Zone qualify as onshore for VAT purposes. They are subject to the same VAT compliance obligations and rights as businesses that are not located in a Designated Zone. They may be required to register, account for, file, and pay VAT under general VAT regulations (or decide to do so voluntarily).
Businesses in the UAE can also form VAT groups with other businesses if they meet certain requirements. Furthermore, input VAT recovery on taxable expenses is subject to standard UAE rules.
Guidelines for Designated Zones
A complex set of VAT rules governs transactions within Designated Zones. If a business operates within Designated Zones or transacts with a business that operates within Designated Zones, it must fully understand the rules.
service provision
An area of a Designated Zone serving as a place of supply of service acts as if it were an area of the mainland (i.e., the UAE) that supplies the service. In essence, they will be subject to regular VAT rules.
Transfers of goods into a Designated Zone
Transfers of goods into a Designated Zone are subject to the following general rules:
A supply moving from outside the UAE into a Designated Zone is not subject to UAE VAT because the supply appears to be moving from outside the UAE to outside the UAE.
A movement or supply from the mainland UAE into a Designated Zone is subject to the same tax rules as intra-UAE movements. It does not qualify as an export.
Transferring goods between Designated Zones is exempt from UAE VAT. According to the GCC Common Customs Law, goods transferred between Designated Zones cannot be released into circulation, used, or modified during the transfer.
Goods imported from Designated Zones
Imports are the supplies of goods into the UAE from a Designated Zone. Such supplies are subject to import taxes.
Takeaway
This blog clarifies and provides practical advice on the fact that not all Free Zone Companies are tax exempt. Due to the complexity of the VAT rules governing transactions in Designated Zones, business owners are advised to consult expert VAT consultants about their tax situation.
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