When it comes to UAE VAT, many founders and businesses assume that operating in a Free Zone automatically means “tax-free.” This is a common misconception. In fact, the VAT treatment of goods depends heavily on whether the Free Zone is a normal Free Zone or a Designated Free Zone.
At Finzoryx, we believe in providing clarity to business owners so they can make informed decisions, remain compliant, and avoid costly penalties. Let’s break down the difference.
What is a Free Zone?
Free Zones are special economic areas that allow 100% foreign ownership, simplified setup, and customs benefits. From a VAT perspective, however, most Free Zones are treated the same as the mainland.
Supplies of goods within a Free Zone are subject to 5% VAT, just like any domestic supply, unless the goods are exported outside the UAE. This is aligned with Article 45 of Federal Decree-Law No. 8 of 2017 on VAT, which provides zero-rating only when goods are physically exported.
In short: a Free Zone does not automatically mean “VAT-free.”
What is a Designated Free Zone?
A Designated Zone is a specific Free Zone listed by the UAE Cabinet that is treated differently under VAT law. According to Article 51 of the Executive Regulations (Cabinet Decision No. 52 of 2017), Designated Zones are considered outside the UAE VAT territory for goods, subject to conditions.
This means:
- Movement of goods between Designated Zones can be outside the scope of VAT, provided the goods do not enter the mainland.
- Imports into a Designated Zone may have different VAT accounting treatments.
- Services, however, remain taxable even within Designated Zones, as clarified in Article 51(7) of the Executive Regulations.
Examples include Jebel Ali Free Zone (JAFZA), Khalifa Industrial Zone Abu Dhabi (KIZAD), Dubai Airport Free Zone, and Sharjah Airport Free Zone.
Key Differences: Free Zone vs Designated Free Zone
| Aspect | Free Zone (Normal) | Designated Free Zone |
|---|---|---|
| VAT Treatment of Goods | Treated like mainland – 5% VAT applies if supplied within UAE | Treated as outside UAE for VAT on goods (Article 51 Executive Regulations), if conditions are met |
| Services | Always subject to VAT | Always subject to VAT |
| Export Relief | Only if goods physically leave UAE (Article 45 VAT Law) | Movement of goods between Designated Zones can be outside VAT scope |
| Examples | DMCC, RAKEZ, Dubai Media City | JAFZA, KIZAD, Dubai Airport Free Zone |
Why This Matters for Your Business
Misunderstanding the VAT treatment of goods can lead to:
- Charging VAT incorrectly on invoices
- Non-compliance during FTA audits
- Penalties and interest for underpaid or wrongly claimed VAT
By knowing whether your business operates in a normal Free Zone or a Designated Free Zone, you can correctly determine the VAT treatment of your supplies.
Finzoryx Approach
At Finzoryx, we guide founders through the complexity of UAE tax and compliance rules with our 3C model – Clarity, Compliance, Confidence.
We simplify VAT treatment for Free Zones and Designated Free Zones, ensuring your business:
- Charges VAT correctly
- Benefits from available exemptions
- Avoids penalties and compliance risks
📞 Talk to Finzoryx today to make sure your VAT treatment is correct and penalty-proof.
✉️ connect@finzoryx.com | 📱 0503978121