VAT in UAE Designated Zones: A Complete Guide for Businesses in 2025
Disclaimer: This article is for general guidance only and is based on Flying Colour Tax Consultant LLC's interpretation of UAE VAT legislation, Cabinet Decision No. 52 of 2017, and subsequent amendments. It should not be treated as formal tax advice.
The UAE VAT law has introduced a unique concept called Designated Zones. This is to support international trade, logistics business, those into manufacturing and warehousing activities. Although there is a common assumption that Designated Freezones are “VAT-free” which is not entirely accurate
Businesses operating in the designated zones should properly understand their VAT applicability on goods and services, how to keep the records, how to raise invoices and timely reporting. Failure will result in VAT assessments, administrative penalties or inability to take input tax credit during Federal Tax Authority (FTA) audits.
This blog explains what Designated Zones are, VAT applicability on them, common misconceptions and practical transaction examples.
What Is a Designated Zone Under UAE VAT?
A Designated Zone is a specific, bounded geographic area within the UAE, which is officially listed in UAE Cabinet decisions and subject to strict customs controls.
Key characteristics include:
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Physically bounded with restricted entry/exit rules
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Fall under the supervision of customs
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Required to follow proper inventory record-keeping
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Recognised under the Cabinet decisions as a Designated Free Zone for VAT purposes
Examples of DFZ include a few like JAFZA, KIZAD, ADGM Designated Zone areas, and Dubai Airport Free Zone (DAFZA). Please note that all Free Zones are recognised as Designated Zones.
➤ Not all Free Zones are Designated Zones.
Applicability of VAT depends on official Cabinet decisions, not on the licensing authority.
VAT Treatment in Designated Zones — The Core Rules
1️. Supply of Goods Within the Same Designated Zone
If the goods are purchased, stored and transferred within the same Designated Zone:
✅ These transactions will be treated as outside the UAE under VAT
✅ No VAT will be applied, provided there are proper records for the transactions
2️. Supply of Goods Between Two Designated Zones
If goods are transferred from one Designated Zone to another:
✅ VAT not applicable as it falls under Out of scope
✅ There must be strict customs controls, evidence for transportation and inventory records required
3️. Goods Moving From Designated Zone to UAE Mainland
In case if both parties are VAT-registered:
✅ Treated as an import of goods into the mainland
✅ Mainland entity is subject to VAT under reverse charge or customs
4️. Goods Imported Into a Designated Zone
If the goods are brought into a Designated Zone from outside the UAE:
✅ Not required to pay import VAT immediately
✅ VAT will be applicable only when goods are taken for mainland consumption
This is the main reason why logistics, warehousing and regional trading companies often choose Designated Zones for their business.
5️. Supply of Services in Designated Zones
This is the most misinterpreted part under VAT for Designated zones. Unlike goods, services are always subject to VAT in the UAE.
✅ VAT applies to services at the standard rate of 5%, unless it is classified under zero-rated transactions
✅ Being in a Designated Zone does not exempt services from the purview of VAT rules
Example: Services like consultancy, auditing, advertising, accounting, legal work, HR services, et, from a Designated zone will fall under the applicability of VAT
Practical Business Scenarios
✅ Example 1 — No VAT
A company in JAFZA sold goods stored in its warehouse to another JAFZA company, and the goods were within the freezone only.
VAT Outcome → Outside the scope of VAT, no VAT charged.
✅ Example 2 — VAT Applies
A trader in KIZAD sells goods to a retailer operating in the Dubai mainland.
VAT Outcome → VAT applies at the standard rate of 5%, treated as a domestic supply.
✅ Example 3 — Warehousing & Export
A logistics company stores goods in a Designated Zone and exports to Saudi Arabia.
VAT Outcome → Export of goods and VAT will be 0%, but accurate export proof is required.
✅ Example 4 — Services Provided in a Designated Zone
An IT company in DAFZA provides software subscriptions to another DAFZA business.
VAT Outcome → 5% VAT, because VAT exemption applies only to goods, not to services.
Common Misunderstandings About VAT in Designated Zones
➤ “Designated Zones do not involve VAT.”
✔ Only specific movements of goods may receive special VAT treatment. Services generally do not fall under this category.
➤ “Any Free Zone company is automatically outside the VAT system.”
✔ VAT relevance depends on whether the area is officially listed as a Designated Zone.
➤ “Goods kept in a Designated Zone can be moved to the mainland without VAT.”
✔ Once goods are supplied to the mainland, normal VAT rules typically apply.
➤ “Businesses in Designated Zones do not need to handle VAT registration.”
✔ If a business reaches the required turnover amount, registration becomes necessary within the applicable time frame.
Documentation & Compliance Requirements
FTA requires strong supporting documents:
✅ Records for movement of inventory
✅ Contracts records, sales invoices, delivery notes etc
✅ Import/export documentation from customs
✅ Proof of physical movement of goods
✅ Log records of the warehouse
✅ VAT returns for supporting exempt or out-of-scope claims
Failure to maintain records may result in VAT reassessment by FTA, even if the transactions fall under the exempted category for VAT
When Must a Designated Zone Business Register for VAT?
VAT registration is mandatory when:
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Taxable supplies exceed AED 375,000 in the last 12 months
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Imports into the mainland exceed the threshold
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Providing taxable services anywhere in the UAE or exporting services
Voluntary registration allowed above supplies of AED 187,500.
Why VAT Compliance Still Matters in Designated Zones
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FTA may audit Designated Zone businesses frequently without notice
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Incorrect VAT treatment may lead to penalties
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Issues often arise due to missing or incorrect documentation
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E-invoicing and digital tax technology will also apply soon on DFZs soon
✅ Best Practices for Companies in Designated Zones
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Conduct regular VAT reviews on transactions
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Maintain automated tracking for inventory
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Confirm VAT treatment before raising an invoice
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Keep export and customs evidence ready for submission any time
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Educate sales and logistics staff on the tax regulations
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Review contracts for VAT clauses
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Seek expert tax advice before restructuring the business
Final Thoughts
Designated Zones are offering many advantages for warehousing, distribution, import/export, e-commerce, trading and manufacturing businesses in the UAE. However, misinterpreting VAT rules may result in compliance failure, penalties and unexpected tax exposure.
Proper classification, documentation and VAT treatment are mandatory compliance requirements for all businesses, not optional.
✅ Need VAT Clarification for Your Designated Zone Business?
Flying Colour Tax Consultant LLC assists with:
· VAT registration & advisory on VAT applicability
· VAT implementation for Free Zone logistics & trading
· Support on FTA audit
· VAT return filing & compliance reviews
· Structuring import/export transactions under VAT regime
· VAT training to staffs
Frequently Asked Questions (FAQs)
1️. Are Designated Zones completely VAT-free?
No. Only qualifying supply of goods fall under out of scope for VAT. Services remain taxable.
2️. Do companies in Designated Zones need VAT registration?
Yes, if they reach the mandatory or voluntary turnover of VAT thresholds.
3️. Is VAT charged when goods move from a Designated Zone to mainland UAE?
Yes. Treated as a taxable supply or import of goods
4️. Are exports from a Designated Zone zero-rated?
Yes, if export documentation is maintained.
5️. Do service providers in Designated Zones charge VAT?
Yes. Standard rate of 5% VAT applies unless zero-rating conditions are met.
To learn more about VAT in UAE Designated Zones: A Complete Guide for Businesses in 2025, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.