UAE VAT: WHAT ARE DESIGNATED ZONES AND WHAT DOES IT MEAN TO MY BUSINESS?

Under the VAT guide on Designated Zones (“DZs”) the Federal Tax Authority (“FTA”) has confirmed the VAT treatment applicable to businesses operating in DZs as provided for in the VAT Law and Executive regulations, and clarified the treatment of supplies in specific cases where previously there was some ambiguity.

The key noteworthy clarifications are:

  1. If the supply of services from the designated zones is provided within UAE, VAT charged is at the standard rate of 5%. If the supply is of export of services, the VAT is zero rated.
  2. If the supply of goods is within the designated zones, it is not subject to UAE VAT law.
  3. The Onus is on the supplier to ensure that it treats the supply correctly for VAT purpose. Therefore, the supplier should be satisfied that there is no reason to believe that the goods may be used by the purchaser for non-qualifying purposes. A written statement from the recipient of the goods that it will not be consumed in a non-qualifying manner is sufficient.
  4. Transfer from mainland UAE to DZs of goods and services is not considered to be an export and is therefore treated as local supply, and VAT charged is standard rated.
  5. Transfer of goods between DZs is outside the scope of UAE VAT law provided:
  6. goods (in part or in whole), are not released into circulation, nor used or altered in any way during the transfer, and
  7. transfer of the goods is undertaken in accordance with the rules for Customs suspension per the GCC Common Customs Law.
  8. The FTA may require the owner of the goods to provide a financial guarantee for the payment of VAT, which that person may be liable, if the conditions in point 5 are not met.
  9. Upon importing goods from DZs into the mainland, the Import VAT is payable by the importer.

Your next step:

Businesses should consider the implications of this VAT guide on their transactions to ensure that the right class of transactions are being taken into consideration and the correct amount of input VAT is being recovered, and further more understand the impact on their business operations and continuously ensure that the correct VAT treatment is being applied to its transactions.

Our role:

Affiniax Partners can assist you to assess the impact of this clarification and advise you on the recoverability of input VAT and VAT treatment of transactions involving such instances.

Appendix:

The Cabinet Decision No. 59 confirms that the following Free Zones in the UAE are to be treated as Designated Zones. These Designated Zones will be subject to special rules for supplies of goods within those Designated Zones:

  • Free Trade Zone of Khalifa Port
  • Abu Dhabi Airport Free Zone
  • Khalifa Industrial Zone
  • Jebel Ali Free Zone (North-South)
  • Dubai Cars and Automotive Zone (DUCAMZ)
  • Dubai Textile City
  • Free Zone Area in Al Quoz
  • Free Zone Area in Al Qusais
  • Dubai Aviation City
  • Dubai Airport Free Zone
  • Hamriyah Free Zone
  • Sharjah Airport International Free Zone
  • Ajman Free Zone
  • Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port
  • Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road
  • RAK Free Trade Zone
  • RAK Maritime City Free Zone
  • RAK Airport Free Zone
  • Fujairah Free Zone
  • FOIZ (Fujairah Oil Industry Zone)

UNDERSTANDING VAT ON ENTERTAINMENT EXPENSES

The Federal Tax Authority (“FTA”) issued a Public Clarification Article 52 of Cabinet Decision no. (52) of 2017 on the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on VAT.

Entertainment has been defined as hospitality of any kind, including the provision of accommodation, food and drinks not provided in the normal course of a business meeting, and access to events or trips.

When the hospitality provided becomes an end in itself, such costs are considered to be entertainment, and are not recoverable.

It is worth noting that:

  1. VAT incurred on any costs which are used for genuine business purpose or is incidental to business purpose shall be recoverable. For example, food and drink provided during meetings, food and drinks purchased by an employee for own consumption during a business trip, and sundry office expenses such as tea and coffee supplies or flowers for display in offices.
  2. Input VAT is non-recoverable on entertainment expenses incurred for non-employees. For example, customers and potential customers, shareholders and officials (except for certain exceptions).
  3. Where a business is uncertain whether hospitality is provided in the normal course of the business then it should not recover input VAT.
  4. For conferences and business events, when a fee is charged, and output VAT is accounted for, Input VAT is recoverable. If no fee is charged, Input VAT is non-recoverable.
  5. Expenses incurred purely for the entertainment of employees such as Staff dinner, and Ramadan Iftar, etc. and free of cost goods and services as rewards are not recoverable unless the employee is charged for the same.
  6. If there is a legal obligation to provide those goods or services under the applicable UAE labour law to employees or a contractual obligation to provide the same to the employees in order for them to perform their role then VAT may be recoverable.

Your next step:

Businesses should consider the implications of this clarification on their transactions involving such expenses to ensure that the right class of transactions are being taken into consideration and the correct amount of input VAT is being recovered, and furthermore understand the impact on their business operations and continuously ensure that the correct VAT treatment is being applied to its transactions.

Our role:

Affiniax Partners can assist you to assess the impact of this clarification and advise you on the recoverability of input VAT and VAT treatment of transactions involving expenses of this nature.