A number of our existing clients have inquired whether VAT is required for Free zones. We setup a brief Q&A discussion thread so we can update all our newsletter readers.
What is the current situation?
The truth is that regarding Free zone entities it is not certain that VAT rule will apply (rate 5%).
The UAE VAT law has referred to a word ‘Designated zones’
(under Articles 50 & 52 of the Law). The UAE VAT Law does not state which areas will be considered as a designated zone. Designated zones are thought just to be Free zone companies.
Thus we will have to wait for the VAT Executive Regulations and a clarification to be issued by the Ministry of Finance to provide more clarity on what would be considered as ‘Designated Zone’. The Ministry says that it will resolve the issue of “designated zones” by the fourth quarter of 2017.
If designated areas include Freezone companies will they face VAT?
At present, the UAE VAT law provides that the designated zone will be treated as outside UAE for the VAT purposes. The transfer of goods from one designated zone to another can be done without any VAT being due. The VAT Executive Regulations will provide for business conducted within designated zones to be within scope of VAT subject to conditions which would be provided by the VAT Executive Regulations.
Thus if let’s say Oneworld Mideast (local company) invoices the RAKIA Freezone that you may have for a consulting service, Oneworld Mideast will not have to charge VAT at your RAKIA company. And this applies vice versa.
What is the rationale for Free zones VAT?
Technically speaking Free zone companies do not engage trade in Dubai. On the other hand they are entitled to UAE visas and tax resident certificates. A bit contradicting to say the least, but you understand the grey area involved.
Who will be included in this new VAT scheme for sure?
It will definitely include companies that trade within Dubai (Mainland - LLC Companies). Oneworld Mideast for example will have to charge 5% VAT from our PC/ Laptop supplier for the new laptops we bought.
Furthermore, only businesses that meet a certain minimum annual turnover requirement will have to register for VAT. That is, many small businesses will not need to register for VAT. They made this decision to safeguard small businesses from the extensive documentation and reporting that a system like VAT requires. Also, businesses may not need to register with the government if they only provide goods and services which are not subject to VAT.
As the UAE government quotes “UAE VAT law is currently being finalized, and will be published once approved. Announcements regarding the Tax Law will be made to the press and details will be published on the Ministry of Finance website.”
If you are interested in VAT in Dubai and how it affects yourself or your clients please contact our director Alexandros Philippides at firstname.lastname@example.org
. We will issue a dedicated newsletter mainly focused on VAT and its reporting requirements once all issues are clear by the Ministry of Finance of the UAE.