A couple of weeks ago, a load of headlines came up explaining that, in some free zones in the UAE, value-added tax (VAT) won’t apply.
And while that’s technically true, according to a statement released by the Ministry of Finance last week, there’s a little more to the free zone rules than the headlines would suggest. In fact, it’s unlikely that, as a consumer, you’d find a way of getting out of paying VAT on products, even if you deal with free zone companies.
First, let’s get down to what constitutes a VAT-exempt free zone. The Ministry of Finance calls them designated zones, and to qualify as a designated zone, you need to meet a number of criteria. For example, you’ll need to be a specific geographic area, with fences dividing the area from the rest of the country. You’ll need customs and security checks and the entrances, too, meaning that the movement of goods and people into and out of the zone are tracked.
There are 20 of these zones in the UAE. And, for VAT purposes, they’re treated as being outside of the UAE. That means, if you’re buying and selling goods within these zones, you won’t have to pay VAT. The same applies with importing and exporting goods. If you’re in one of these designated zones, you can import goods from abroad and you won’t have to pay VAT.
And the news is good if you’re, in, say Jebel Ali Free Zone, but you want to move some goods to Dubai Airport Free Zone. According to the Ministry of Finance, the sale of goods between designated zones isn’t subject to VAT. So businesses can still trade between the designated zones tax-free.
But as a consumer, this isn’t actually very helpful. These provisions have been set up almost exclusively for the business-to-business market. If you ‘import’ a good from a designated zone company to the UAE mainland, you’ll still have to pay VAT on that import. So, even if, somehow, you got a B2B company in a designated zone to sell you something as an individual, as soon as you leave the designated zone for your house with that good, you’ll have to pay tax on it.
In fact, services, water, energy and goods sold for consumption are all subject to VAT – whether they originate from a designated zone or not.
So, yes, the designated zone rule will be helpful if you a run a business that operates in one of the free zones that quality. But, no, the rule isn’t a loophole to get you out of paying VAT on your goods and services.