Ever since the introduction of Value Added Tax (VAT) in the UAE, it has become an important part of businesses operating in the country. VAT is applied to many goods and services with a standard rate of 5%. However, certain commodities are zero-rated, and some are even exempt from this tax. Therefore, it is vital to be aware of the rules concerning VAT for Freezone companies in UAE.
Free Zones in the UAE are free trade zones offering many privileges to businesses such as tax exemption, foreign ownership, etc. These zones are regulated by specific local authorities appointed for the particular free zone. According to Article 51 of the Executive Regulations, certain free zones in the UAE are called Designated zones if they meet the following criteria:-
- An enclosed and secured geographic region.
- The area has adequate security measures and customs to keep track of who comes and goes and what moves in and out of the zone.
- It follows rules about how things should be kept, stored, and worked on internally.
- The person managing the Designated Zone follows the rules of the Free Zone Authority.
Hence, any free zone that fulfills the above requirements and places itself on the cabinet’s list will be considered a Designated Zone. Some of the names included in this list are the International Free Zone Authority (IFZA), Jebel Ali Free Zone Authority (JAFZA), Dubai International Financial Center (DIFC), and Ras Al Khaimah Economic Zone (RAKEZ).
Although Free Zones present great opportunities for entrepreneurs, it has set forth specific VAT rules for businesses, especially regarding VAT registration for free zone companies in UAE. Hence, businesses need to be well informed of the difference between designated and non-designated zones, goods qualified for zero-rated supplies, the VAT compliance procedures, and other VAT implications.
VAT for Freezone companies in UAE
The application of VAT on Free Zone companies depends on several factors. Businesses that meet the minimum requirements for VAT registration for free zone companies in UAE are required to go through the FTA’s defined procedure. Free Zone entities with an annual turnover between AED 187,500 and AED 375,000 can register independently for VAT. Therefore, they need to understand whether they reach this threshold to determine their VAT obligations, such as charging VAT on taxable supplies, filing regular VAT returns, etc.
Difference between Designated Zones and Non-Designated Zones in the UAE
The distinction between designated and non-designated zones is one of the key concepts of VAT for Freezone companies in UAE.
Designated Zones
Designated zones are specific free zones designated by the Federal Tax Authority (FTA). Since they are outside the territorial scope of the UAE, goods and services supplied within these zones are exempt from VAT. However, it includes some exceptions:
- If a free zone entity supplies services to a mainland entity, VAT would be applied at 5%.
- If a free zone entity supplies goods or services to non-commercial consumers within the zone, VAT would be applied.
Non-Designated Zones
Businesses operating in non-designated zones are subject to the standard VAT rates. Moreover, they do not enjoy the same VAT benefits as designated zones. Hence, to understand their VAT obligations better, companies need to understand which category their zone falls into.
VAT treatment in UAE Free Zones
The standard VAT rate in the UAE is 5%, applied to goods and services that do not qualify for any exemptions or preferential treatment. However, certain supplies are zero-rated and tax-exempt.
Tax-exempt VAT
Goods and services that are not subject to VAT are called tax-exempt supplies. For example, certain healthcare and educational services. This simply means that businesses do not charge tax on such supplies, and hence, cannot claim input tax credits on related purchases.
Zero-rated VAT
Zero-rated supplies are those goods and services on which the VAT rate charged is 0%. However, businesses can recover the input tax on relevant purchases. This applies to specific goods and services and exports that successfully meet the defined criteria.
Specific VAT Treatment within Free Zones
The treatment of VAT on goods and services can vary in free zones, but with several considerations:
- Import and export – In designated zones, no VAT would be charged on imported goods until they are moved outside the region. This significantly reduces the burden of cash flow for companies. On the other hand, exports from designated zones are usually zero-rated, allowing companies to sell goods to international borders without VAT.
- Services – VAT is applied based on the nature of the service and where it is supplied. For instance, services offered within a designated zone would not be subject to VAT, whereas services supplied to customers outside the zone might incur VAT.
- VAT refunds – Free zone entities are eligible for VAT refunds on certain expenses incurred within the designated zone.
VAT registration for free zone companies in UAE
While some free zones are designated zones, others may require VAT registration depending on the specific activities and the nature of supplies. So, here’s a general procedure to register for VAT for Freezone companies in UAE:-
Determine the registration requirement –
Designated zones are usually VAT exempted. However, if the supplies are made to non-business consumers within the zone or outside the zone, the businesses may have to register for VAT. Similarly, companies operating in non-designated zones are required to register if they meet the standard registration threshold. Businesses that earn below this threshold can choose to register voluntarily.
Prepare the required documents –
Make sure to assemble the necessary documents required for the registration process, such as:
- Trade license
- Passport or ID copy of the owner
- Proof of company address
- Details of bank account
- Financial statements
- Details of taxable supplies and imports
Create an account on the FTA’s website –
Visit the official website of FTA to create an account. Click on the registration section and set up an account with your email address and password.
Complete the registration application –
Log in with the credentials and fill out the application form in the VAT registration section. The form would require the following details:
- Description of business activities
- Estimated annual turnover
- Details about the free zone
Make sure that the provided input is accurate and complete, to avoid any discrepancies and delays in the registration process.
Submit the application for approval –
Fill out the application form and review all the information before submitting it to the FTA. Further, the authorities will review the application and seek additional information if required. Once approved, the authorities will issue a Tax Registration Number (TRN) for your business.
Consequences of Non-Registration
If the company fails to register for VAT as per the requirement of law, it will be registered by the FTA from the date it should have been registered. Likewise, businesses that fail to comply with VAT registration rules will be subject to fines and penalties.
Hence, to avoid such situations, you can consider hiring a licensed tax agent in the UAE like Shuraa Tax, to help you with the process.
Complete your VAT registration with Shuraa Tax
Shuraa Tax Consultants and Accountants help business owners in the UAE with accounts reporting, auditing, tax, and support like VAT, Corporate tax, Excise Tax, and Tax Residency Certification. Their team of qualified tax advisors assists businesses in staying compliant with the UAE’s taxation laws.
Contact Shuraa today at [email protected] and make the process hassle-free.
