Designated Zones and Free Zones

Designated Zones and Free Zones have special considerations under UAE tax laws. 


Prerequisites


Table of Contents


What are Designated Zones and Free Zones

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A Designated Zone is a specific area assigned to be outside the UAE for Value Added Tax (VAT) purposes. Even if Designated Zones are located inside the territory of the UAE, for VAT purposes, they are dealt with as being outside the UAE for trading with goods. However, Tax is applied to the goods when they are traded between the Designated Zone and the Mainland (United Arab Emirates).


Free Zones in the UAE have been designated primarily to boost international business. Within a free zone, firms can be completely owned by expatriates without the need for local partnership. Businesses in the free zones (which are not classified as designated zones) will be taxed at the usual VAT rates. 


Supply in Designated Zones

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If your Organisation is registered for VAT within a designated zone, your supply & demand will be different from that of a regular VAT-registered Organisation. You need to select if locations in your organisation are in a designated zone during setup. This is covered in DEAR systems VAT compliance


Let's have a look at how your transactions will be affected based on your contact’s tax treatment:

  • Sales Transactions in Designated Zones
  • Purchase Transactions in Designated Zones


NOTE: The supply of services within a designated zone will have the same treatment as that of the mainland.


Sales Transactions in Designated Zones

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Go through the below diagram to have a basic idea on how the tax treatment of your customers will affect your supply in designated zones.


Customer Tax RuleLocation/BinsTax Rates
VAT RegisteredUAEProducts (out of scope), Services (Standard rate, Zero-rate, Exempt, Out of scope)
Non VAT RegisteredUAEStandard rate, Zero-rate, Exempt, Out of scope
GCC VAT RegisteredUAEProducts (Out of scope), Services (Standard rate, Zero-rate, Exempt, Out of scope)
GCC VAT RegisteredGCCOut of Scope
GCC Non-VAT RegisteredUAEStandard rate, Zero-rate, Exempt, Out of scope
GCC Non-VAT RegisteredGCCOut of scope
Non-GCC-Products (Out of scope), Services (Zero-rate)
VAT Registered - Designated ZonesUAEProducts (Out of scope), Services (Standard rate, Zero-rate, Exempt, Out of scope)
Non-VAT Registered - Designated ZonesUAEProducts (Out of scope), Services (Standard rate, Zero-rate, exempt, Out of scope)


Refer to the UAE Federal Tax Authority Guidelines for VAT Compliance in Designated Zones for detailed information. 


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