VAT DESIGNATED ZONE IN UAE

VAT DESIGNATED ZONE IN UAE

According to the Executive regulations of the tax law, a designated Zone is a specific fenced geographic area and has security measures and Customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area. 

Additionally, a designated zone shall have internal procedures regarding the method of keeping, storing and processing of goods and the operator of the designated zone complies with the procedures set by the Federal Tax Authority (FTA).

For businesses established and operating in free zones that do qualify as designated zones, the applicability of the VAT regime is summarized below.

Tax Registration

In light of the specification under paragraph 9 of article 51 of the Decision, it is fair to say that businesses will have to register with the Federal Tax Authority if they reach the turnover threshold of Dh375,000 and may do so voluntarily if their turnover is Dh187,500.

Taxable Supplies

The supply of goods and services in the UAE mainland by designated zone businesses is not contemplated by the Decision and the Tax Law, for the simple reason that free zones companies are generally restricted to do business outside of the free zone areas. All other main situations would seem to work as follows:

• Transfer or supply of goods from the UAE mainland into the designated zone will not be considered as an export of goods. Therefore the supplier will charge VAT to the designated zone recipient of goods, subject to applicable exemption or rate (5 or 0 per cent).

• Supply of goods from abroad into the designated zone will not be considered import of goods in the UAE. Therefore the invoice received will only reflect any VAT if and how applicable to the foreign supplier, without triggering any reverse charge requirement.

• Supply of goods among businesses in designated zones will not be subject to VAT, on condition that the goods are kept in their original status during the transfer and the transfer is made in compliance with applicable customs rules.

• Supplies of goods and services made by designated zones’ businesses abroad remain VAT exempt.

• Supplies of services made within a designated zone will be considered as being made in the UAE. Therefore, such supplies would seem to trigger VAT, subject to applicable exemption or rate (5 or 0 per cent), although this scenario is not clear.

Overall, there appears to be limited benefits for free zones from qualifying as designated zones.  Here's the complete list of Designated Zones as per the Annex to the Cabinet Decision No (59) of 2017 No. Designated Zones.

Abu Dhabi

1. Free Trade Zone of Khalifa Port

2. Abu Dhabi Airport Free Zone

3. Khalifa Industrial Zone

Dubai

4. Jebel Ali Free Zone (North-South)

5. Dubai Cars and Automotive Zone (DUCAMZ)

6. Dubai Textile City

7. Free Zone Area in Al Quoz

8. Free Zone Area in Al Qusais

9. Dubai Aviation City

10. Dubai Airport Free Zone

Sharjah

11. Hamriyah Free Zone

12. Sharjah Airport International Free Zone

Ajman

13. Ajman Free Zone

No. Designated Zones (Umm Al Quwain)

14. Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port

15. Umm Al Quwain Free Trade Zone on Shaikh Mohammad Bin Zayed Road

Ras Al Khaimah

16. RAK Free Trade Zone

17. RAK Maritime City Free Zone

18. RAK Airport Free Zone

Fujairah

19. Fujairah Free Zone

20. FOIZ (Fujairah Oil Industry Zone)

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All you need to know about the zero-rated, exempt supplies in UAE –VAT

All you need to know about the zero-rated, exempt supplies in UAE –VAT

Do suppliers of zero-rated and exempt supplies charge VAT? 

Suppliers do not charge tax on a zero-rated or exempt supply. 

What is the zero rate? 

If you make supplies at the zero rate, this means that the goods are still VAT taxable but the rate of VAT is 0%. You will need to record any zero-rated supplies in your VAT account and report them on your tax return. 

If I make zero-rated supplies, do I need to register? 

As a supplier, you must register for VAT if your taxable turnover (which includes zero-rated supplies) exceeds Dh375,000 in a 12-month period, or if you expect your taxable turnover (which includes zero-rated supplies) to exceed Dh375,000 in the next 30 days.

However, you can ask for an exception from registration if, and only if, you do not make any other supplies which are taxable at the standard rate of 5%. If exception from registration is granted, then you will not submit regular tax returns and you will not be able to recover input tax incurred.

Do I need to file returns if I only supply zero-rated supplies?

If you do not qualify for an exception from registration, then you must file tax returns with the FTA. You will also be entitled to recover input tax incurred on business purchases subject to the normal conditions.

What are zero-rated supplies? 

Supplies subject to the zero rate are listed in Article 45 of the Federal Decree-Law no. (8) of 2017 on Value Added Tax, such as:

·         Exports of goods and services.

·         International transport of goods and passengers.

·         Certain means of transport, such as trains, trams, vessels, airplanes.

·         First sale/rent of residential buildings.

·         Aircraft or vessels designated for rescue and assistance by air or sea.

·         Certain investment precious metals.

·         Certain healthcare services and related goods and services.

·         Certain educational services and related goods and services.

Who are suppliers of zero-rated supplies?

 Registrants who could be suppliers of zero-rated services and goods include exporters, real estate developers, airlines, schools, clinics, hospitals, etc.

What is exempt?

Exempt supplies are not taxable supplies for VAT purposes. VAT is not charged on exempt supplies and the supplier cannot recover any VAT on expenses incurred in making those exempt supplies. Exemptions will also be strictly applied as they are an exception to the normal rule that VAT should be charged.

If I make exempt supplies, do I need to register?

If all the supplies you make are exempt, you do not have to register for VAT. In such a case, you cannot recover tax incurred on business purchases. Examples of such would be owners of property who rent their properties for residential purposes.

What are Exempt Supplies?

Exempt supplies are listed in Article 46 of the Federal Decree-Law no. (8) of 2017 on Value Added Tax, such as:

·      Financial services including life insurance and reinsurance of life insurance as well as financial services that are not conducted for an explicit fee, discount, commission, rebate or similar type of consideration.

·      Residential buildings, other than the residential buildings which are specifically zero-rated.

·      Bare land.

·      Local passenger transport.

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UAE- VAT will impact education sector?

UAE- VAT will impact education sector? 

1. What is the VAT treatment of education?

The main educational services and related goods and services supplied shall be zero rated, if supplied by any of the following 'qualifying educational institutions':

·         Nurseries, preschools and schools

·         Higher educational institutions owned or funded by federal or local government.

This means that a 'qualifying educational institution' shall not charge VAT on the zero rated educational services they provide, and will be able to recover the VAT they pay on related costs when they file their tax returns.

Any educational services provided by other entities not listed above shall be subject to the standard rate (i.e. 5%).

2. Does a 'qualifying educational institutions' have to register for VAT?

Provision of educational services by a 'qualifying educational institutions' is a zero-rated taxable supply. Hence, if the supplies exceed the mandatory registration threshold of Dh375,000, then the institution needs to register.

It may apply for exceptions from registration via the registration application if the institution does not provide any services or goods taxed at the standard rate of 5%.  Applying for an exception will relieve the school from filing regular returns, but would also mean the school cannot recover the input tax incurred on its expenses.

3. Can anybody supply zero-rated education?

No. Only 'qualifying educational institutions' can provide zero-rated supplies.   'Qualifying educational institutions' are those educational entities recognised by the federal or local competent government entity regulating the education sector where the course is delivered, and in the case of higher education institutions, they are either owned by the federal or local government or receive more than 50% of their annual funding directly from the federal or local government.

That means that education provided by all other educational entities does not qualify for zero-rating and such institutions must charge standard-rate VAT on their supplies of education.

4. Is all education supplied by education institutions zero-rated?

Only educational service which are provided in accordance with the curriculum recognized by the federal or local competent government entity regulating the education sector where the course is delivered can be zero-rated.  If an educational entity supplies education that is not in accordance with a recognized curriculum, it must charge VAT at the standard rate (i.e. 5%) on those supplies.  In a limited number of cases, an educational institution may provide educational services to students free of charge and the education is wholly funded by government grants. Provided the conditions for zero-rating are still met i.e. it is a recognized curriculum supplied by an educational institution, then the grant income can be treated as a zero-rated.

5. What about related goods and services?

If a 'qualifying educational institution' supplies other goods and services that are directly related to a zero-rated supply of education, they qualify for zero-rating as well. For example, books and digital reading material supplied by educational institutions that are related to the curriculum being taught also qualify for zero-rating.

6. Are there any exceptions to zero-rating?

Yes. There are supplies related to the provision of the education services which are subject to the standard rate (i.e. 5%), such as:

·      Goods and services supplied by a 'qualifying educational institution' to persons who are not enrolled in it;

·      Any goods, other than educational materials provided by a 'qualifying educational institution', that are consumed or transformed by the students being taught by it;

·      Uniforms or any other clothing which are required to be worn by a 'qualifying educational institution', irrespective of whether or not they are supplied by such institution as part of the supply of educational services.

·      Electronic devices used in educational services, irrespective of whether or not supplied by a 'qualifying educational institution' as part of the supply of educational services.

·      Food and beverages supplied at a 'qualifying educational institution' including supplies from vending machines or vouchers in respect of food and beverages.

·      Field trips, unless these are directly related to the curriculum of an education service and are not predominantly recreational.

·      Extracurricular activities provided by or through a 'qualifying educational institution' for a fee additional to the fee for the education service.

·      A supply of membership in a student organisation. A 'qualifying educational institution' must charge and account for VAT on its charges for each of the above items.

Another exception to zero rating is the provision of school transportation, which falls under "domestic transportation" and hence is exempt.

7. What is the VAT treatment of student accommodation?

Student accommodation is included within the definition of residential accommodation, therefore the supply of student accommodation (other than the first supply of a new residential building) will be exempt from VAT.  Educational institutions which also supply accommodation to students will be unable to recover VAT incurred on costs which directly relate to the provision of the accommodation.

 
8. What about grant income or sponsorship received?

In some cases, educational institutions may receive grant income or sponsorships from the government or third parties. The VAT treatment of grant/sponsorship income depends on whether you are providing the donor with a benefit in return for the funding received. Where a benefit is provided, you are likely to be making a taxable supply of services for VAT purposes and should account for the VAT on the income received.  A benefit could include e.g. naming an event after a sponsor, giving free of charge or reduced price tickets in return for the sponsorship, displaying the sponsors logo in a predominant place on flyers etc. However, where there is no significant benefit received, the income will be treated as outside the scope of VAT.

9. Is grant funded research subject to VAT?

Again, the VAT treatment of grant income received to fund research depends on the extent of the benefit provided to the funder of the research. Where the educational institution is required to provide certain deliverables in return for the funding and is required to provide the intellectual property and other products of the research to the funder then this will be a supply of research services and subject to VAT at 5%.  However, where the funder does not receive anything in return for the funding other than incidental information e.g. progress updates, records of expenses, evidence that the research has been conducted as requested, then this is will not be considered to be a supply of services by the educational institution and the grant income received will be outside the scope of VAT. VAT incurred on costs which are linked to an outside the scope supply and not linked to a taxable supply made by the business should not be recoverable as an overhead cost of the business in line with the business' input tax apportionment percentage.

SOURCE: FEDERAL TAX AUTHORITY

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UAE VAT- List of Supplies and VAT Treatment

The Federal Tax Authority (FTA) of UAE has announced the list of supplies that will be subject to Value Added Tax (VAT), revealing selected sectors that will be assigned zero-rated tax, such as education, healthcare, oil and gas, transportation and real estate.

The below table outlines all supplies that will be subject to the 5% VAT, as well as zero-rated supplies and exempt supplies:

VAT treatment on select industries:

Education

Descriptions	VAT rate
Private and public school education (excluding higher education) and related goods and services provided by education institution	0%
Higher education provided by institution owned by government or 50% funded by government, and related goods and services	0%
Education provided by private higher educational institutions, and related goods and services	5%
Nursery education and pre-school education	0%
School uniforms	5%
Stationery	5%
Electronic equipment (tablets, laptops, etc.)	5%
Renting of school grounds for events	5%
After school activities for extra fee	5%
After school activities supplied by teachers and not for extra charge	0%
School trips where purpose is educational and within curriculum	0%
School trips for recreation or not within curriculum	5%

Healthcare:

Preventive healthcare services including vaccinations	0%
Healthcare services aimed at treatment of humans including medical services and dental services	0%
Other healthcare services that are not for treatment and are not preventive (e.g. elective, cosmetic, etc)	5%
Medicines and medical equipment as listed in Cabinet Decision	0%
Medicines and medical equipment not listed in Cabinet Decision	5%
Other medical supplies	5%

Oil and Gas:

Crude oil and natural gas	0%
Other oil and gas products including petrol at the pump	5%

Transportation:

Domestic passenger transportation (including flights within UAE)	Exempt
International transportation of passengers and goods (including intra-GCC)	0%
Supply of a means of transport (air, sea and land) for the commercial transportation of goods and passengers (over 10 people)	0%
Supply of goods and services relating to these means of transport and to the transportation of goods and passengers	0%

Real Estate:

Sale and rent of commercial buildings (not residential buildings)	5%
First sale/rent of residential building after completion of construction or conversion	0%
First sale of charitable building	0%
Sale/rent of residential buildings subsequent to first supply	Exempt
Hotels, motels and serviced accommodation	5%
Bare land	Exempt
Land (not bare land)	5%
UAE citizen building own home	5% (recoverable)

Financial Services:

Margin based products (products not having an explicit fee, commission, rebate, discount or similar)	Exempt
Products with an explicit fee, commission, rebate, discount or similar	5%
Interest on forms of lending (including loans, credit cards, finance leasing)	Exempt
Issue, allotment or transfer of an equity or debt security	Exempt

Insurance and Re-insurance:

Insurance and reinsurance (including health, motor, property, etc)	5%
Life insurance and life reinsurance	Exempt

Food and Beverages:                               5% VAT rate

Telecommunications and electronic services:

Wired and wireless telecom & electronic services: 5% VAT rate

Government Activities:

Sovereign activities which are not in competition with the private sector undertaken by designated government bodies	Considered outside VAT system
Activities that are not sovereign or are in competition with the private sector	VAT rate dependent on good/service ignoring provider

Not for Profit Organizations:

Activities of foreign governments, international organisations, diplomatic bodies and missions acting as such (if not in business in the UAE)	Considered outside VAT system
Charitable activities undertaken by societies and associations of public welfare which are listed by Cabinet Decision	Considered outside VAT system
Activities of other not for profit organizations (not listed in Cabinet Decision) which are not business activities	Considered outside VAT system
Business activities undertaken by the above organizations	VAT rate dependent on good/service ignoring provider

Free zones:

Supplies of goods between businesses in designated zones	Considered outside VAT system
Supplies of services between businesses in designated zones	VAT rate dependent on service ignoring location
Supplies of goods and services in non-designated zones	VAT rate dependent on good/service ignoring location
Supplies of goods and services from mainland to designated zones or designated zones to mainland	VAT rate dependent on good/service ignoring location

Other:

Export of goods and services to outside the GCC implementing states	0%
Activities undertaken by employees in the course of their employment, including salaries	Considered outside VAT system
Supplies between members of a single tax group	Considered outside VAT system
Any supplies of services or goods not mentioned above (includes any items sold in the UAE or service provided)	5%
Second hand goods (e.g. used cars sold by retailers), antiques and collectors' items	5% of the profit margin

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