These 20 areas in UAE are exempt from VAT

Federal Tax Authority has listed free zones across the seven emirates.

The Federal Tax Authority on Wednesday announced 20 designated zones which would be exempt from the recently-implemented five per cent VAT in the country, bringing a major relief and clarity for the companies operating in the free zones.

"The designated zones are special zones for VAT purposes, which are generally considered outside of the UAE in terms of value-added taxation. While VAT applies throughout the UAE, in the designated zones VAT generally does not apply. Only fenced free zones with special controls on goods and services going in and out could benefit from this status. As expected, important free zones such as Jafza, Dafza and Kizad are on the list," said Thomas Vanhee, founding partner, Aurifer Middle East Tax.

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"Although the UAE VAT law foresees this special regime, businesses that had transactions with these free zones were in the dark until January 9, 2018. Although the FTA had announced that the designated zones for VAT would be somewhat similar to those for excise taxes, in absence of any published cabinet decision, there was no legal basis not to apply VAT on imports into the free zones," said Vanhee.

The wait for these decisions has caused a lot of confusion among importers, exporters, clearing agents and forwarders, he said.

Mayank Sawhney, director, MaxGrowth Consulting, said there are a few surprises in this list of notified designated zones such as the Free Zone Area in Al Quoz and Free Zone Area in Al Qusais in Dubai. It has not been clearly defined in the Cabinet decision as to which exact places in these two locations are free zone areas.

He said any supply of goods within the notified designated zone or from one notified designated zone to another notified designated zone - subject to necessary controls and procedures being followed and conditions of providing financial guarantee, etc., if required being met - shall not be subject to VAT.

Girish Chand, director, MCA Management Consultants, said the announcement would bring a lot of clarity to businesses, especially in the healthcare industry and companies operating within freezones.

The other long-awaited Cabinet decision is on medical supplies as certain supplies of medication and medical equipment which are registered with the Ministry of Health (MoH) can benefit from a zero rate, Vanhee said.

"This, however, does not extend to services related to medical equipment although hospitals often rent equipment. The practical issues with registering goods with MoH shall now also have a tax impact," he said.

Both decisions work retroactively from January 1, 2018. This means quite a large number of invoices need to be corrected as VAT will have been applied on certain imports and sales in the designated zones and on medical supplies. Unduly invoiced VAT is not deductible, Vanhee concluded.