Designated Zones

What is a Designated Zone?


A Designated Zone is any specific area assigned to be outside the UAE for Value Added Tax (VAT) purposes. Territories designated to offer incentives to businesses, in this case, Value Added Tax (VAT) will not be levied on goods which are imported directly to a designated zone. However, Tax is applied to the goods only when they are supplied outside of the designated Zone within the Mainland (United Arab Emirates)


What is a Free Zone?


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


If you're 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 your organization as a designated zone while setting it up.


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


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 Rule
Location/Bins
Tax Rates
VAT Registered
UAE
Products (out of scope), Services (Standard rate, Zero-rate, Exempt, Out of scope)
Non VAT Registered
UAE
Standard rate, Zero-rate, Exempt, Out of scope
GCC VAT Registered
UAE
Products (Out of scope), Services (Standard rate, Zero-rate, Exempt, Out of scope)
GCC VAT Registered
GCC
Out of Scope
GCC Non-VAT Registered
UAE
Standard rate, Zero-rate, Exempt, Out of scope
GCC Non-VAT Registered
GCC
Out of scope
Non-GCC
-
Products (Out of scope), Services (Zero-rate)
VAT Registered - Designated Zones
UAE
Products (Out of scope), Services (Standard rate, Zero-rate, Exempt, Out of scope)
Non-VAT Registered - Designated Zones
UAE
Products (Out of scope), Services (Standard rate, Zero-rate, exempt, Out of scope)



Let’s read through to understand each of these cases with the help of a few examples.


Case 1


Customer Tax Rule

  • VAT Registered

Location/Bins

  • UAE

Tax Rates

  • Products - out of scope, Services - Standard rate, Zero-rate, Exempt, Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to a VAT-registered customer within the UAE, and the supply also takes place within the UAE.


In this scenario, the supply of Products is out of the scope of VAT. For services, the supply can have any one of the following taxes:

  • 5%
  • 0%
  • Exempt
  • Out of the scope of VAT

Case 2


Customer Tax Rule

  • Non-VAT Registered

Location/Bins

  • UAE

Tax Rates

  • Standard rate, Zero-rate, Exempt, Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to an Organisation who is not registered for VAT within the UAE, and the supply also takes place within the UAE.


In this scenario, the supply of Products and services can have any one of the following taxes:

  • 5%
  • 0%
  • Exempt
  • Out of the scope of VAT


Case 3


Customer Tax Rule

  • GCC VAT Registered

Location/Bins

  • UAE

Tax Rates

  • Products - out of scope, Services - Standard rate, Zero-rate, Exempt, Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to a VAT-registered customer who is a member within any of the GCC countries and is registered for VAT in that country, and the supply also takes place within the UAE.


In this scenario, the supply of Products is out of the scope of VAT. For services, the supply can have any one of the following taxes:

  • 5%
  • 0%
  • Exempt
  • Out of the scope of VAT


Case 4


Customer Tax Rule

  • GCC VAT Registered

Location/Bins

  • GCC

Tax Rates

  • Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to a VAT-registered customer who is a member within any of the GCC countries and is registered for VAT in that country, and the supply also takes place within the particular GCC member country.


In this scenario, the supply of Products and services can have any one of the following taxes:

  • Out of the scope of VAT

Case 5


Customer Tax Rule

  • GCC Non-VAT Registered

Location/Bins

  • UAE

Tax Rates

  • Standard rate, Zero-rate, Exempt, Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to an Organisation within the GCC member countries who have not registered for VAT, and the supply also takes place within the UAE.


In this scenario, the supply of Products and services can have any one of the following taxes:

  • 5%
  • 0%
  • Exempt
  • Out of the scope of VAT

Case 6


Customer Tax Rule

  • GCC Non-VAT Registered

Location/Bins

  • GCC

Tax Rates

  • Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to a customer who is not registered for VAT, who is a member within of the GCC, and the supply also takes place within the particular GCC member country.


In this scenario, the supply of Products and services can have any one of the following taxes:

  • Out of the scope of VAT

Case 7


Customer Tax Rule

  • Non-GCC

Location/Bins

  • -

Tax Rates

  • Products - Out of scope, Services - Zero-rate


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to a customer who is outside any of the GCC member states. 


In this scenario, the supply of Products is out of the scope of VAT. For services, the supply is zero-rated.


Case 8


Customer Tax Rule

  • VAT Registered - Designated Zones

Location/Bins

  • UAE

Tax Rates

  • Products - Out of scope, Services - Standard rate, Zero-rate, Exempt, Out of scope

i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to a VAT-registered customer within a Designated Zone in the UAE and the supply takes place in the UAE.


In this scenario, the supply of Products is out of the scope of VAT. For services, the supply can have any one of the following taxes:

  • 5%
  • 0%
  • Exempt
  • Out of the scope of VAT

Case 9


Customer Tax Rule

  • VAT Registered - Designated Zones

Location/Bins

  • UAE

Tax Rates

  • Products - Out of scope, Services - Standard rate, Zero-rate, Exempt, Out of scope

i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and supply products or services to a customer within a Designated Zone in the UAE who has not registered for VAT and the supply takes place in the UAE.


In this scenario, the supply of Products is out of the scope of VAT. For services, the supply can have any one of the following taxes:

  • 5%
  • 0%
  • Exempt
  • Out of the scope of VAT


NOTE: Sale in a designated zone for non-business purposes is taxed at the standard rate.


Purchase Transactions in Designated Zones


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


Supplier Tax Rule
Location/Bins
Tax Rates
VAT Registered
UAE
Standard rate, Zero-rate, Exempt, Out of scope
Non VAT Registered
UAE
Out of scope
GCC VAT Registered
UAE
Products (Out of scope), Services (Reverse charge, Standard, Zero-rate)
GCC VAT Registered
GCC
Exempt
GCC Non-VAT Registered
UAE
Products (Out of scope), Services (Reverse charge, Standard, Zero-rate)
GCC Non-VAT Registered
GCC
Out of scope
Non-GCC
-
Products (Out of scope), Services (Reverse charge, Standard, Zero-rate)
VAT Registered - Designated Zones
UAE
Products (Out of scope), Services (Standard rate, Zero-rate, Exempt, Out of scope)
Non-VAT Registered - Designated Zones
UAE
Out of scope


Case 1

Supplier Tax Rule

  • VAT Registered

Location/Bins

  • UAE

Tax Rates

  • Standard rate, Zero-rate, Exempt, Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a VAT registered supplier within the UAE and the supply takes place in the UAE.


In this scenario, the supply of Products and services can have any one of the following taxes:

  • 5%
  • 0%
  • Exempt
  • Out of the scope of VAT


Case 2


Supplier Tax Rule

  • Non-VAT Registered

Place of Supply

  • UAE

Tax Rates

  • Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a supplier who is not registered for VAT and the supply takes place in the UAE.



In this scenario, the supply of Products and services can have any one of the following taxes:

  • Out of the scope of VAT



Case 3


Supplier Tax Rule

  • GCC VAT Registered

Place of Supply

  • UAE

Tax Rates

  • Products - Out of scope, Services - Reverse charge, Standard, Zero-rate


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a supplier who is a member of the GCC countries and is registered for VAT in that particular country, and the supply takes place in the UAE.



In this scenario, the supply of products is out of the scope of VAT. For services, the reverse charge is applied and they can have any one of the following taxes:

  • 5%
  • 0%


Please review if the description Matches the Case4 scenario 
Case 4


Supplier Tax Rule

  • GCC VAT Registered

Place of Supply

  • GCC

Tax Rates

  • Exempt


According to the Graph above, What I think it should be

i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a supplier within the GCC member countries and is registered for VAT and the supply takes place in the within the GCC.


In this scenario, the supply of Products and services can have any one of the following taxes:

  • Exempt 


The Diagram shows Case 4 as GCC VAT Registered.


The description does not match the diagram above, Please confirm.


Case 5


Supplier Tax Rule

  • GCC Non-VAT Registered

Place of Supply

  • UAE

Tax Rates

  • Products - Out of scope, Services - Reverse charge, Standard, Zero-rate


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a supplier who is a member within the GCC and not registered for VAT and the supply takes place in the UAE.


In this scenario, the supply of products is out of the scope of VAT. For services, a reverse charge is applied and they can have any one of the following taxes:

  • 5%
  • 0%


Case 6


Supplier Tax Rule

  • GCC Non-VAT Registered

Place of Supply

  • GCC

Tax Rates

  • Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a supplier who is a member of the GCC and not registered for VAT and the supply takes place in the UAE.



In this scenario, the supply of goods and services can have any one of the following taxes:

  • Out of the scope of VAT


Case 7


Supplier Tax Rule

  • Non-GCC

Place of Supply

  • -

Tax Rates

  • Products (Out of scope), Services (Reverse charge, Standard, Zero-rate)


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a supplier who is outside any of the GCC member countries.


In this scenario, the supply of goods is out of the scope of VAT. For services, a reverse charge is applied and they can have any one of the following taxes:

  • 5%
  • 0%


Case 8


Supplier Tax Rule

  • VAT Registered - Designated Zones

Place of Supply

  • UAE

Tax Rates

  • Products (Out of scope), Services (Standard rate, Zero-rate, Exempt, Out of scope)


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a supplier who is within a Designated Zone in the UAE, registered for VAT and the supply takes place in the UAE.


In this scenario, the supply of goods is out of the scope of VAT. For services, the supply can have any one of the following taxes:

  • 5%
  • 0%
  • Exempt
  • Out of the scope of VAT


Case 9


Supplier Tax Rule

  • Non-VAT Registered - Designated Zones

Place of Supply

  • UAE

Tax Rates

  • Out of scope


i.e. Suppose your Organisation is registered for VAT within a designated zone in the UAE and purchase products or services from a supplier who is in a designated zone in the UAE, not registered for VAT and the supply takes place in the UAE.


In this case, the supply of goods and services can have any one of the following taxes:

  • Out of the scope of VAT


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