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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
  1. Free Trade Zone of Khalifa Port
  2. Abu Dhabi Airport Free Zone
  3. Khalifa Industrial Zone
  4. Al Ain International Airport Free Zone
  5. Al Butain International Airport Free Zone
Designated Zones – Dubai
  1. Jebel Ali Free Zone (North-South)
  2. Dubai Cars and Automotive Zone (DUCAMZ)
  3. Dubai Textile City
  4. Free Zone Area in Al Quoz
  5. Free Zone Area in Al Qusais
  6. Dubai Aviation City
  7. Dubai Airport Free Zone
  8. International Humanitarian City – Jebel Ali
Designated Zones – Sharjah
  1. Hamriyah Free Zone
  2. Sharjah Airport International Free Zone
Designated Zones – Umm Al Quwain
  1. Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port 
  2. Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
Designated Zones – Ras Al Khaimah
  1. RAK Free Trade Zone
  2. RAK Maritime City Free Zone
  3. Al Hamra Industrial Zone – Free Zone
  4. Al Ghail Industrial Zone – Free Zone
  5. Al Hulaila Industrial Zone – Free Zone
Designated Zones – Fujairah
  1. Fujairah Free Zone
  2. FOIZ (Fujairah Oil Industry Zone)
Designated Zones – Ajman

Ajman Free Zone

Which Free Zones should be considered as Designated Zones?

Free Zone = Designated Zone, only if

  • Designated Zone is an area specified by a Cabinet Decision as being a “Designated Zone”
           AND
  • Certain tests of fencing, security controls, and custom controls are in place.

Transfers of goods into Designated Zone from outside the UAE: UAE VAT would not be applicable (Outside the scope of UAE VAT).Transfers of goods into Designated Zone from mainland UAE: These supplies are treated as local supplies, it is not considered to be an export of goods from the UAE. Accordingly, the standard rate i.e. 5% would be applicable.

Transfers between Designated Zones: Transfer of goods between two Designated Zones will be treated as outside the scope of VAT, subject to the previous two conditions being met.

Movement of goods from Designated Zones to Mainland: It will be out of scope supply for supplier located in Designated Zone & it will be considered as an import of goods for mainland buyer. Mainland buyer has to book VAT liability on Reverse Charge Mechamism basis.

Consumption or loss of goods into Designated Zone: Goods which are located in a Designated Zone on which the owner has not paid VAT will be treated as imported into the UAE where the goods are consumed by the owner, unless the goods are incorporated into, attached to or otherwise form part of or are used in the production of another good located in a Designated Zone and that other good is not itself consumed; or the goods are unaccounted for.

Supply of Water & Energy from Designated zone to Mainland or within Designated Zone: Standard rate i.e. 5% VAT will be applicable.

Sales/Lease of Real Estate in Designated Zone: Supplies of real estate (Sales/Lease) made within Designated Zones 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.

Services Related to Real Estate in Designated Zone: Supplies of services related to real estate will be taxable at standard rate i.e. 5% even if supplied within a Designated Zone.

Supply of goods within/between Designated Zones

  • The Authority expects that a written statement from the recipient that the goods will not be consumed, should be sufficient to treat such transaction as “Outside the Scope” of VAT.
  • Where goods are moved between Desig
    ated Zones, the FTA may require the owner of the goods to provide a financial guarantee for the payment of VAT, which that person may become liable for should the conditions for movement of the goods not be met.
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