The Government introduced Value Added Tax (VAT) on 1 January 2018. For the moment of publishing this article, the rate is 5%. However, the TAX value might be 0% as well. Moreover, there are certain goods and services, exempted from VAT. The UAE imposed VAT on TAX-registered companies at each stage of the supply chain. Just a reminder that a company must register for VAT if its annual turnover exceeds AED 375,000. Meanwhile, VAT registration is voluntary, if the annual turnover exceeds AED 187,000.

The calculation of the taxable amount is made for the last 12 months. In this case, the calculation algorithm is the same. VAT applies to companies registered in the Mainland, and Free Zones on equal terms. 

Designated Zones in the UAE

By default, Free Zones that do not belong to the Designated Zones, are considered a part of the UAE, with standard VAT rules. However, there are exceptions, which are subjected to certain limitations in the context of VAT. Such Free Zones received a particular name, known as Designated Zones. It is worth mentioning that transferring goods between designated zones is tax-free. To be considered a Designated Zone, a Free Zone must meet certain criteria, stated in clause 2 of a full guide. To name a few free zones, they are: Jebel Ali Free Zone (North-South), Dubai Textile City, Free Zone area in Al Quoz, Dubai Aviation City, and many more. 

According to the Government portal, Designated Zones are:

• Considered as territories, which are outside the UAE, for VAT purposes for particular goods
• Have strict controlling criteria for the supplied goods
• Obliged to have additional customs procedures to monitor the movement of goods, imported and exported from the designated zone

Zero-Rated VAT and exempt supplies 

In general, all exports of goods in the country are zero-rated. On the other hand, to be qualified as zero-rated supplies, a company must meet certain criteria, mentioned in the UAE Executive Regulations. There are direct and indirect types of export. Direct export refers to the export to the foreign market by the manufacturer, while indirect export means appointing third parties to distribute goods/services in a foreign market. 

Thus, the criteria for the direct export are as follows:

• If the supply of the goods occurs after 90 days, the goods are either physically exported to countries outside the Implementing States, or placed in a suspension regime following GCC Common Customs Law. An implementing state is the state that has generally implemented VAT nationwide according to the VAT framework.
• An exporter retains all official and commercial evidence of an export ban or customs suspension.

Whereas, the criteria for the indirect export are as follows:

• Within 90 days of the date of supply, the goods are exported to a country outside the Implementing States, or put into a customs suspension regime according to GCC Common Customs Law, upon the agreement by the supplier and the overseas customer before the delivery date
• Following GCC Common Customs Law, the overseas customer obtains official and commercial proof of export or customs suspension and provides a copy of the evidence to the supplier.

When goods are exported to a country within a Gulf Cooperation Council region, where VAT is not applied, those goods are considered zero-rated. Similarly, TAX is charged at a zero rate, either in accordance with the nature of goods or by the list of specified goods or services. 

Goods and services, exempted from VAT

As per Article 46 of the Federal Decree-Law, several examples of goods/services that are exempted from VAT, are a supply of residential buildings via lease or sale, which do not fall under the zero-rated category, and bare land supply.

Zero-Rated Tax goods and services

Several examples of goods/services that are subjected to zero-rated VAT are international transport, direct or indirect exports, oil, and gas, government educational services, and healthcare services. More categories are available in the Article 45 of Federal Decree-Law № 8 from 2017 (Federal Decree-Law). 

The common concern of the companies is the difference between zero-rated supplies and exempt supplies since both are not charged for VAT. The key difference between both categories is in two various claiming input tax credit (ITC). If in the first case, the individual can avail VAT paid as ITC, in the second case, one cannot claim ITC on paid VAT value. 

To summarise, we would like to conclude that most businesses in the UAE do not require paying TAX. A corporate TAX is necessary in case of branches of foreign banks, and foreign oil companies. Generally, many companies do not require an accountant, due to the absence of income tax forms to fill. However for larger companies, we advise to seek assistance, in order to avoid the financial liabilities.

If you would like advice or assistance concerning the VAT application and registration, kindly contact us. 

Marsel Shadmanov

Head of Corporate Services at Garant Business Consultancy DMCC

Phone +971 4 421 4335

Email info@garant.ae