The UAE has consistently taken steps to foster a business-friendly environment, and a recent move by the Federal Tax Authority (FTA) further exemplifies this commitment. The FTA’s decision to relieve tax registrants from double VAT taxation on supplies in designated zones represents a significant regulatory update aimed at enhancing the ease of doing business and minimizing compliance burdens. This initiative is expected to benefit businesses operating within the UAE’s designated zones, offering clarity and reducing the financial impact of VAT on supplies.

In this blog, we’ll explore the implications of the FTA’s decision, what it means for businesses, and how it simplifies VAT compliance for those operating in designated zones.

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Understanding VAT in the UAE

Value-Added Tax (VAT) is a consumption tax levied at every stage of the supply chain on the value added to goods and services. Introduced in 2018, VAT is applied at a standard rate of 5% across most goods and services in the UAE. However, designated zones—specific free zones established for economic purposes—enjoy unique treatment under the VAT regime. Supplies made in these zones are treated differently to facilitate trade and investment while maintaining compliance with VAT regulations.

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What Are Designated Zones?

Designated zones are special areas recognized under UAE VAT law, treated as being outside the UAE for VAT purposes. They offer businesses certain exemptions and advantages, making them a popular choice for companies involved in manufacturing, import/export, and other trade activities. Transactions within designated zones often enjoy favorable VAT treatment, provided they meet specific criteria.

However, confusion and complexity around VAT application for supplies between designated zones and mainland UAE have occasionally led to instances of double taxation, creating additional costs and compliance challenges for businesses.

The FTA’s Move to Relieve Double VAT Taxation

To address these challenges and promote business efficiency, the FTA recently introduced measures to eliminate double VAT taxation on supplies within designated zones. This move ensures that businesses will not be subjected to paying VAT twice on the same supply—once in the designated zone and again when supplies are brought to the mainland or other areas subject to UAE VAT regulations.

Key Benefits of the Move:

• Reduced Tax Burden: Businesses no longer face the risk of double taxation on eligible supplies, resulting in lower overall tax costs.
• Clarity and Compliance: The FTA’s move provides clearer guidelines on how VAT applies to transactions involving designated zones, making it easier for businesses to comply with tax regulations.
• Enhanced Trade Efficiency: Companies operating in designated zones can now enjoy a more seamless supply chain process, free from unnecessary VAT costs.

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FTA’s New Amendment

The FTA, on October 30th, 2022, announced an amendment to Article 51 of Cabinet Decision No. (52) of 2017.

According to the amendment, tax registrants are permitted to avoid VAT double taxation for the supply of goods in designated zones. The clarifications to the amendment are available on the authority’s website by FTA. This will raise tax awareness among business sectors and ensure the best tax compliance. As per the document,the supply of goods in the Designated Zone must be transacted outside the scope of UAE VAT, if the goods are not consumed inside the country, or in case the goods are consumed outside the Designated Zone. The shipping and delivery services of Qualifying Goods are also outside the scope of UAE VAT if they are supplied by the same supplier of the goods, under certain conditions, including the supplier is a non-resident who is not registered for VAT in the UAE.

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Implications for Businesses Operating in Designated Zones

The FTA’s decision has several implications for businesses operating within designated zones, particularly those engaged in the supply of goods and services across the UAE:

1. Cost Savings and Increased Profitability

With the elimination of double VAT taxation, businesses can achieve cost savings, improving their overall profitability. By avoiding unnecessary tax liabilities, companies can reallocate resources to other areas of growth and investment.

2. Simplified VAT Compliance

The move simplifies VAT compliance by clarifying the treatment of supplies in designated zones. Businesses can focus on their core operations without navigating complex tax structures or fearing unexpected double taxation penalties.

3. Encouragement for Trade and Investment

Reducing the tax burden on supplies in designated zones makes the UAE an even more attractive destination for trade, manufacturing, and investment. By enhancing the ease of doing business, the FTA’s decision strengthens the UAE’s position as a regional and global economic hub.

Example: A business importing raw materials into a designated zone for manufacturing and subsequently supplying finished goods to the mainland will now benefit from reduced VAT complications, enhancing its ability to compete locally and internationally.

What Businesses Should Do Next

To maximize the benefits of the FTA’s new measures, businesses operating in designated zones should:

1. Review Existing VAT Practices: Assess current transactions involving supplies in designated zones to identify areas where double taxation may have occurred. Adjust VAT filings accordingly to align with the new guidelines.
2. Seek Professional Advice: Engage with tax professionals or VAT consultants to ensure full compliance with updated regulations and take advantage of available relief measures.
3. Maintain Accurate Records: Accurate record-keeping is essential for demonstrating compliance with VAT rules and qualifying for relief from double taxation.

Conclusion: A Step Toward a More Business-Friendly UAE

The FTA’s move to relieve tax registrants from double VAT taxation on supplies in designated zones is a testament to the UAE’s commitment to fostering a supportive business environment. By reducing the tax burden, providing clearer compliance guidelines, and simplifying trade processes, the UAE continues to solidify its position as a leading global hub for business and innovation. Businesses operating in designated zones can now focus on growth, innovation, and expansion, free from the complexities of double taxation.

For expert guidance on navigating VAT compliance in the UAE, contact us today and ensure your business takes full advantage of this beneficial regulatory update.