Everything You Need to Know About Designated Zones in UAE: Eight Essential Insights

The UAE is home to a rapidly expanding business ecosystem, and understanding the intricacies of its tax system is crucial for any company looking to capitalise on its opportunities. One significant element of the UAE’s tax structure is the concept of Designated Zones in UAE. These zones offer businesses substantial benefits, particularly with regards to VAT (Value Added Tax) and Corporate Tax, which can significantly impact a company’s bottom line.

Whether you’re planning to set up a business in a Designated Zone or already operating in one, understanding how VAT and Corporate Tax are applied within these zones is crucial for compliance and maximising tax efficiency.

Building on our previous series about Dubai Freezones, with the latest available in our article on Dubai Freezones for Science, Technology, and Sustainability, this guide explores eight essential insights into Designated Zones in the UAE that every business should understand.

1. What Exactly Are Designated Zones in UAE?

Designated Zones in UAE are specific areas that are considered outside the UAE territory for VAT purposes. In practice, this means that certain supplies of goods and services within these zones may be exempt from VAT, offering significant tax advantages to businesses that operate within them. This can be an attractive proposition for international and local businesses, particularly those involved in manufacturing, distribution, and logistics.

However, it’s important to note that not all free zones in the UAE are classified as Designated Zones. Only those that meet specific criteria set out by the UAE government are eligible for this status. Businesses operating in Designated Zones can benefit from VAT exemptions, which can make a huge difference in terms of operational costs.

While free zones across the UAE generally offer benefits such as full foreign ownership, tax exemptions, and customs duty exemptions, Designated Zones take this a step further, particularly in their treatment of VAT. For businesses involved in cross-border trade, this offers even more advantages.

2. How to Identify Designated Zones in UAE

It’s essential for businesses to understand the criteria for identifying a Designated Zone. These zones must meet specific legal and logistical requirements before they can be officially classified as Designated Zones, making it crucial to ensure compliance with these criteria. Here are the main features that a zone must have:

• Physical Boundaries and Security: The zone must be a clearly defined, fenced area, with its own security systems in place. This is important for controlling the movement of goods and people in and out of the area.
• Regulations for Goods Handling: There must be clear procedures for the storage, processing, and movement of goods within the zone. This ensures that all activities comply with UAE’s regulatory framework.
• Customs and Monitoring: The zone must have its own customs controls in place to monitor and regulate the flow of goods. This is in line with the UAE’s aim of maintaining efficient logistics operations while also ensuring that there are no loopholes in its VAT system.
• Compliance with FTA Regulations: The zone operator must comply with all the rules and regulations set out by the Federal Tax Authority (FTA) in order to qualify for VAT exemption.

By meeting these criteria, Designated Zones in UAE are able to ensure that VAT is applied correctly, and businesses operating in these areas can benefit from the VAT exemptions on certain goods and services.

For companies looking for expert guidance on VAT compliance, WellTax can help navigate the nuances of Designated Zones in UAE, ensuring businesses fully understand their tax obligations.

3. Key Designated Zones in UAE

The UAE offers several Designated Zones across its various emirates, each catering to different industries. These zones are strategically located to encourage business activities and offer various advantages such as reduced tax rates and simplified customs procedures. Here’s an overview of some of the key Designated Zones in UAE:

Abu Dhabi

• Khalifa Port Free Trade Zone: One of the UAE’s most prominent ports, this zone is ideal for businesses involved in logistics and maritime activities.
• Abu Dhabi Airport Free Zone: This zone caters to businesses involved in aviation, logistics, and trade, offering a prime location for companies dealing with international transport.

Dubai

• Jebel Ali Free Zone (North-South): A significant logistics hub, this zone plays a key role in international trade and commerce.
• Dubai Airport Free Zone: An attractive location for businesses involved in aviation, e-commerce, and logistics, benefiting from its proximity to Dubai International Airport.

Sharjah

• Hamriyah Free Zone: A key industrial area known for its strategic location near the UAE’s key ports, serving industries such as petrochemicals, manufacturing, and logistics.
• Sharjah Airport International Free Zone: Catering to businesses in logistics, aviation, and trade, this zone offers excellent infrastructure and access to both sea and air transport.

Ajman

• Ajman Free Zone: A popular destination for small and medium-sized enterprises (SMEs) across a variety of sectors, offering easy access to both local and international markets.

These Designated Zones are spread across the UAE, offering businesses a range of environments suited to different industries, from logistics to technology. As a result, each zone is designed with specific sectors in mind, making it easier for businesses to find a location that fits their operational needs.

4. How VAT Works in Designated Zones in UAE

One of the most compelling reasons to establish a business in one of the Designated Zones in UAE is the VAT treatment. Businesses in these zones can benefit from exemptions on VAT for certain goods and services, depending on the nature of the transaction. Here’s how VAT works in these zones:

• Supply of Goods: Generally, the supply of goods within a Designated Zone is outside the scope of VAT, meaning businesses do not have to charge VAT on these transactions. However, if the goods are intended for personal use, VAT is applicable. This rule is designed to ensure that VAT applies only to goods that are consumed and not to goods that are part of business operations.
• Supply of Services: For services within Designated Zones, VAT will usually apply unless the services are exported outside the GCC. In those cases, the services may qualify for zero-rating.

For businesses operating in Designated Zones in UAE, understanding these nuances is crucial to ensure VAT compliance. WellTax can help businesses navigate these rules and make sure that VAT is applied correctly.

5. Goods Movement Between Designated Zones and the Mainland UAE

Understanding the movement of goods between Designated Zones and mainland UAE is critical for businesses involved in logistics or international trade. The movement of goods within and outside Designated Zones in UAE can have VAT implications, and businesses need to be aware of these.

• Movement from Mainland to Designated Zones: Goods moved from the mainland to a Designated Zone are subject to VAT as they are considered a local supply.
• Movement Between Designated Zones: Transfers of goods between Designated Zones are generally outside the scope of VAT, provided that certain conditions are met, such as ensuring the goods remain unchanged.

If you’re a business involved in logistics, having a clear understanding of these VAT rules is key to ensuring your operations remain compliant.

For more detailed advice, this article explains why working with a Tax Agent in the UAE can make a world of difference in staying compliant with local tax laws.

6. VAT Recovery in Designated Zones in UAE

One of the main benefits for businesses in Designated Zones in UAE is the ability to recover VAT. If a business makes taxable supplies, it can recover the VAT it pays on purchases related to those supplies. However, this can be a complex process, and businesses need to ensure that their VAT recovery procedures are accurate and in compliance with UAE tax regulations.

• Eligible Supplies: Businesses making taxable supplies are eligible to recover VAT on the inputs used in these supplies.
• Exempt and Zero-Rated Supplies: If your business deals exclusively with exempt or zero-rated supplies, you will not be able to recover VAT on the expenses incurred for those supplies.

WellTax provides comprehensive VAT recovery services, helping businesses identify eligible VAT recovery opportunities while ensuring that all claims are in compliance with UAE VAT law.

7. Real Estate and VAT in Designated Zones in UAE

Real estate transactions in Designated Zones follow specific rules when it comes to VAT. If you are involved in real estate development or leasing, understanding these rules is essential.

• Sales and Leases: Generally, the sale or lease of real estate within Designated Zones is outside the scope of VAT. This also applies to construction materials used for real estate development within the zone.
• Real Estate Services: However, real estate services, such as the granting of rights to use or occupy property, may be subject to VAT. This is a key distinction for businesses involved in property leasing or management within Designated Zones.

8. Corporate Tax Advantages for Companies in Designated Zones

In addition to VAT exemptions, businesses operating in Designated Zones in UAE may benefit from favourable corporate tax treatments. Here’s an overview of the potential corporate tax advantages:

• No Withholding Taxes: Companies in Designated Zones are often exempt from withholding taxes on dividends, interest, and royalties, simplifying profit repatriation.
• Full Foreign Ownership: Companies in Designated Zones can enjoy full foreign ownership, a significant advantage over mainland UAE businesses that, in certain cases, may need a local partner.
• Simplified Tax Filing: Operating in Designated Zones means fewer bureaucratic hurdles, reducing the administrative burden.

Additionally, businesses engaged in Qualifying Activities like the distribution of goods within Designated Zones may qualify for 0% Corporate Tax, if they can be considered a Qualifying Free Zone Person. To be eligible, the activity must involve tangible, movable goods that are bought and sold for resale, and the activity must be conducted in or from a Designated Zone. Goods sold to resellers or used as raw materials for further production will meet the criteria, while sales to end consumers do not.

By ensuring your business meets these criteria, you can take full advantage of the 0% Corporate Tax and other tax benefits available in Designated Zones in UAE. WellTax can assist in ensuring compliance and maximising these advantages.

WellTax: Your Trusted Partner in Navigating Designated Zones in UAE

Navigating the complexities of VAT in Designated Zones in UAE can be challenging, but WellTax is here to help. With our expertise, we guide businesses through the maze of VAT and Corporate Tax regulations, ensuring that your operations remain fully compliant while maximising potential tax savings.

If you’re considering setting up a company in a Designated Zone or need expert advice on VAT or Corporate Tax, take a look at our Guide to Doing Business in the UAE.