UAE VAT Designated Zones
A known area of focus for FTA audits
The application of the Designated Zone (DZ) rules is a known area of focus for the United Arab Emirates (UAE) Federal Tax Authority (FTA) when conducting checks on repayment returns, and for broader FTA audits. In our experience, many businesses are facing material exposures to tax assessments and penalties arising from incorrect application of the DZ rules and associated requirements to account for import Value Added Tax (VAT).
Who is this alert for?
Any business which operates and make supplies from a DZ for VAT purposes in the UAE and any business that receives goods from suppliers located within a DZ in the UAE. More specifically, we would expect this alert will be of particular interest to those businesses involved in supply chains which involve the movement of goods within, between, to and from DZ’s, particularly where goods cross the UAE border.
Designated Zones rules – recent issues
We have seen a number of recent examples where businesses are facing material exposures to tax assessments and penalties arising from the incorrect application of the DZ rules, either in relation to their own supplies or as a result of the VAT treatment applied by vendors.
In our experience, many businesses struggle to apply DZ rules to the practical
examples they face in their business on a day to day business. As a result, businesses are being required to make adjustments to supplies previously treated as out of scope of VAT, in order to charge VAT at 5% to their customers. Such corrections can attract significant penalties which increase over time and can be up to 350% of the original tax due.
In addition, the recent Public Clarification VATP012 on Importation of goods by agents on behalf of VAT registered persons, raises some important points about the eligibility to recover VAT paid on import. In certain cases, this will lead to businesses being required to make adjustments to the value of import VAT automatically populated in Box 6 of the VAT return. In many cases, businesses appear not to have fully considered the implications of the Public Clarification on their current business and reporting practices.
If you are a business involved in supply chains which include movements of goods within, between, to and from DZ’s there is a risk that VAT rules may be applied incorrectly in many cases, including:
- Supplies made under a Delivered Duty Paid (DPP) incoterm, or similar arrangements involving delivery of goods to premises in the UAE mainland
- Supplies where the Importer of Record (IOR) is not owner of the goods at the time of import e.g. where the customer imports the goods under their own import license before legal title transfers·
- Supplies where goods are entered into a DZ under an import license which authorizes imports into a different DZ or UAE Free Zone·
- Supplies of goods made where the customer intends to consume the goods within its own business or for private purposes·
- Supplies of goods where the supplier is unaware of the purpose to which the customer will put those goods·
- Supplies involving or related to real estate situated within the DZ, amongst others
Where supply chains involve goods which are also subject to Excise Tax, further
complications can arise.
List of Designated Zones in the UAE
Designated Zones - Abu Dhabi
- Free Trade Zone of Khalifa Port
- Abu Dhabi Airport Free Zone
- Khalifa Industrial Zone
- Al Ain International Airport Free Zone
- Al Butain International Airport Free Zone
Designated Zones - Dubai
- Jebel Ali Free Zone (North-South)
- Dubai Cars and Automotive Zone (DUCAMZ)
- Dubai Textile City
- Free Zone Area in Al Quoz
- Free Zone Area in Al Qusais
- Dubai Aviation City
- Dubai Airport Free Zone
- International Humanitarian City – Jebel Ali
Designated Zones - Sharjah
- Hamriyah Free Zone
- Sharjah Airport International Free Zone
Designated Zones - Umm Al Quwain
- Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
- Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
Designated Zones - Ras Al Khaimah
- RAK Free Trade Zone
- RAK Maritime City Free Zone
- Al Hamra Industrial Zone – Free Zone
- Al Ghail Industrial Zone – Free Zone
- Al Hulaila Industrial Zone – Free Zone
Designated Zones - Fujairah
- Fujairah Free Zone
- FOIZ (Fujairah Oil Industry Zone)
Designated Zones - Ajman
Ajman Free Zone