In the UAE VAT system, the concept of “Designated Zones” plays a crucial role in determining how VAT applies to goods and services traded within specific geographic areas. These zones are areas treated as being outside the UAE for VAT purposes with certain conditions, especially when it comes to the supply of goods. Understanding how these zones function and the special VAT treatment they receive is essential for businesses operating in or transacting with Free Zones across the country.
This blog provides a detailed explanation of UAE VAT Designated Zones, including their definition, VAT implications, FTA rules, and the complete list of zones currently recognized by the Federal Tax Authority (FTA).
Definition of a Designated Zone Under UAE VAT
According to Cabinet Decision No. 59 of 2017 on Designated Zones, a Designated Zone is a specific fenced geographical area within the UAE that is treated as being outside the UAE for VAT purposes—but only under certain conditions. These zones must meet strict criteria to retain this VAT treatment.
Designated Zones are not automatically exempt from VAT. Their VAT treatment depends on the nature of the supply, whether it involves goods or services, and whether the conditions specified in UAE VAT law are met.
Conditions for Designated Zone Status
The Federal Tax Authority (FTA) will recognize a Free Zone as a Designated Zone if it meets all of the following conditions:
- The zone must be a fenced geographic area with security and customs controls in place
- It must have internal procedures for controlling the movement of goods
- It must comply with the conditions laid out by the UAE Cabinet and monitored by the FTA
- Goods supplied within and between Designated Zones must not enter the UAE mainland unless VAT is accounted for
VAT Treatment of Goods in Designated Zones
Supplies of goods within or between Designated Zones are generally not subject to VAT, provided they are not released into the UAE mainland. The supply of goods will only be zero-rated or outside the scope of UAE VAT if:
- The goods are not consumed within the Designated Zone
- The supply is between two Designated Zones
- Appropriate customs documentation is maintained
If goods are moved from a Designated Zone to the mainland UAE, VAT at 5% becomes applicable, and the importer is liable to pay VAT through the reverse charge mechanism or on import declaration.
VAT Treatment of Services in Designated Zones
Unlike goods, services supplied within or from a Designated Zone are treated as taxable under standard UAE VAT rules. This means services provided by a business in a Designated Zone are generally subject to VAT at 5%, even if the recipient is also in a Designated Zone.
This distinction is critical—only supplies of qualifying goods benefit from the Designated Zone VAT relief. Services are treated as being supplied in the UAE unless specifically zero-rated or exempt.
Complete List of UAE VAT Designated Zones (as per latest FTA update)
The FTA periodically updates the official list of Designated Zones. Below is the current list, grouped by Emirate:
Abu Dhabi
- Free Trade Zone of Khalifa Port
- Khalifa Industrial Zone
- Abu Dhabi Airport Free Zone
Dubai
- Jebel Ali Free Zone (JAFZA)
- Dubai Airport Free Zone (DAFZA)
- Dubai Silicon Oasis Authority
- Dubai Cars and Automotive Zone (DUCAMZ)
- Dubai Textile City
- International Humanitarian City
Sharjah
- Sharjah Airport International Free Zone (SAIF Zone)
- Hamriyah Free Zone
Ajman
- Ajman Free Zone
Umm Al Quwain
- Umm Al Quwain Free Trade Zone (UAQ FTZ)
Ras Al Khaimah
- RAK Free Trade Zone
- RAK Maritime City Free Zone
- RAK Airport Free Zone
Fujairah
- Fujairah Free Zone
- Fujairah Oil Industry Zone (FOIZ)
PEAK Business Consultancy Services: Free Zone VAT Experts
At PEAK Business Consultancy Services, we help businesses operating within Free Zones understand the full scope of VAT compliance, including invoicing, record-keeping, inter-zone transactions, and FTA filings. We’ve helped companies successfully navigate audits and reduce VAT exposure in both Designated and Non-Designated Zones. Visit www.peakbcs.com to speak with our VAT experts today.
Record Keeping Requirements
Businesses in Designated Zones must maintain detailed records of all transactions, especially those involving the movement of goods. Required records include:
- Import/export documentation
- Proof of intra-zone transfers
- Inventory logs
- VAT invoices for services and mainland transactions
Maintaining these records is vital to justify zero-rated or out-of-scope treatments during FTA audits or reviews.
FTA Compliance and Audit Considerations
The FTA closely monitors Designated Zones to ensure that goods are not being misclassified or improperly accounted for. Businesses must:
- Reconcile all stock and shipment movement
- Avoid invoicing errors when moving goods to the mainland
- Use accurate TRNs and invoice formats
Any discrepancies can lead to penalties, revocation of Designated Zone status, or VAT reassessments. Regular VAT health checks and advisory support are strongly recommended.
Key Differences Between Designated and Non-Designated Free Zones
While all Designated Zones are Free Zones, not all Free Zones are Designated Zones. Non-Designated Zones follow standard UAE VAT rules. The primary differences include:
- Designated Zones offer relief on specific goods supplies, Non-Designated Zones do not
- Intra-zone goods movement may be zero-rated in Designated Zones
- Services are taxable in both zone types
Identifying your zone’s classification is crucial to correctly structuring transactions and filing returns.
Conclusion
UAE VAT Designated Zones offer unique tax treatment that can benefit businesses engaged in the import, export, and trading of goods. However, these benefits come with responsibilities. Accurate documentation, appropriate invoicing, and compliance with FTA’s movement control rules are critical to maintaining zero-rated eligibility.
With years of experience in VAT consulting for Free Zone companies, PEAK Business Consultancy Services is your reliable partner for navigating the complexities of VAT in Designated Zones. From registrations to audits, we help businesses stay compliant and optimize VAT recovery. Get in touch with us at www.peakbcs.com and take control of your VAT obligations today.
