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Value Added Tax and Designated Zones

Cabinet Decision No. (43) of 2019 on Amending the List of Designated Zones Annexed to the Cabinet Decision No. (59) of 2017 on Designated Zones for the purposes of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (effective 4 July 2019).

Designated Zones are:
1. Subject to strict control criteria;
2. Required to have security procedures in place to control the movement of goods and people to and from the  Designated Zone;
3. Required to have Customs procedures to control the movement of goods into and out of the Designated Zone
4. Treated as being outside the territory of the UAE for VAT purposes for certain supplies of goods.

Although an area might be identified as a Designated Zone, it is not automatically treated as being outside the UAE for VAT purposes. There are several main criteria which must be met in order for a Designated Zone to be treated as outside the UAE for VAT purposes. These are as follows:
1. The Designated Zone must be a specific fenced geographic area.
2. The Designated Zone must have security measures and Customs controls in place to monitor the entry and exit of individuals and movement of goods to and from the Designated Zone.
3. The Designated Zone must have internal procedures regarding the method of keeping, storing and processing of goods within the Designated Zone.
4. The operator of the Designated Zone must comply with the procedures set out by the FTA.

A Designated Zone has areas that meet the above requirements, and areas that do not meet the requirements, it will be treated as being outside the UAE only to the extent that the requirements are met. In addition, should a Designated Zone change the manner of its operation or no longer meet any of the conditions imposed on it which led to it being specified as a Designated Zone by way of the Cabinet Decision, it shall be treated as though it is located within the territory of the UAE.

Businesses which are established, registered or which have a place of residence within the Designated Zone are deemed to have a place of residence in the UAE for VAT purposes. The effect of this is that where a business is operating in a Designated Zone, it itself will be onshore for VAT purposes, even though some of its supplies of goods may be outside the scope of UAE VAT.

Designated Zone businesses are considered to be established ‘onshore’ in the UAE for VAT purposes. This means that they have the same obligations as non-Designated Zone businesses and have to register, report and account for VAT under the normal rules. It also means they can join a tax group (VAT group) provided they meet the required conditions. However, in certain instances, an area of a Designated Zone will be effectively treated as ‘offshore’ for VAT purposes, i.e. as if it is outside of the territory of the UAE for the purposes of the tax.

Since UAE VAT only applies on supplies made in the UAE, the special treatment of Designated Zones will affect the VAT treatment of supplies made within Designated Zones.

The following flow chart describes the treatment of supply of goods or services in a designated zone:
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