Designated Zone under UAE VAT

Designated Zone under UAE VAT

Designated Zone in United Arab Emirates (“UAE”) is similar to Special Economic Zone (“SEZ”) in India. Upon fulfilment of certain conditions as set out in Executive Regulation (“ER”), these zones are treated outside the State thereby enjoying the benefits of no taxation and certain other reliefs. As per UAE VAT law, Article 50 & 51 prescribe the meaning of designated zone and treatment of transfer of goods within designated goods respectively.

In this write up, we are going to understand the treatment of tax which involve designated zone as laid down in the article and ER of UAE VAT law.

Mandatory conditions

Mandatory conditions to classify a location as designated zone:

1. Custom Control: fenced zone with security measure which is controlled by Customs to monitor movement of goods and individuals
2. Internal Procedure: to keep, store and process goods
3. Operator: To follow procedures set by Authority

In case of breach as per the procedure laid down by Cabinet the designated zone shall be treated as if within State.

Movement of goods within designated zone

Conditions to comply as per Article 51 when movement of goods is within the designated zone so that no tax is charged: –

1. The goods are not used or altered i.e., they are transferred as is basis
2. The goods are transferred as per Customs provisions

The taxable person shall be required to furnish financial guarantee to move goods within designated zone and upon non-compliance the same shall be taxable.

Consumption within designated zone

Now, if the taxable person intends to consume the goods within the designated zone the place of supply shall be considered within State and liable to VAT, except: –

1. The goods are used or become part but not consumed
2. The goods are delivered outside state i.e., export as per custom regulation and the copy of supplier invoice is retained
3. The goods are moved inside the State and supplier retains the copy of invoice substantiating that VAT was imposed

It is to be noted where the supply is of service to a designated zone the same shall be considered as consumed within State, wherein VAT shall apply except: –

When the services are consumed for

• goods that are not consumed
• exports

(as per Clause 5, Para b & c)

Further, the taxable person needs to comply with below mentioned conditions: –

1. Shipping and delivery services are supplied by same supplier of goods
2. The supplier is Non-resident and not registered under VAT
3. Goods are sold through electronic medium
4. Electronic medium is not owned by supplier

Additional points for designated zone

1. Place of supply in case of supply of water/other energy form shall be considered within State i.e., VAT shall apply even if supplied to designated zone
2. Goods shall be treated as imported goodse., tax shall apply where:
   1. Consumed
   2. Shortage in quantity
3. Any person having place of residence in designated zone shall be considered to have place of residence in State for VAT purpose.

Conclusion:

Understanding the intricacies of VAT regulations in designated zones is crucial for businesses operating in the UAE. Compliance with these rules is essential to avoid unexpected tax liabilities and to ensure the smooth conduct of operations within these advantageous zones.