Value-Added Tax (VAT) is the most common form of taxation in the world. Unlike sales tax that is only imposed on the final sale to the consumers, VAT is applicable on every stage of the supply chain. Over 150 countries have adopted some form of VAT, including all 29 European Union members, Canada, New Zealand, Australia, Singapore and Malaysia. The new VAT law implemented by the UAE Ministry of Finance came into effect on January 1, 2018. Businesses which have a minimum turnover of AED 375,000 are liable to pay VAT on both their supplies and imports. Even though it is expected to drive up costs initially, VAT is expected to provide a boom for businesses after its complete adoption.

UAE has adopted VAT with the intention of reducing the country’s dependency on oil supplies for revenue. It provides a new and stable source of income for the government, which will be used to provide more advanced public services. All kinds of supplies are chargeable to VAT at 5 percent unless they are explicitly exempted. The added revenue from VAT will allow the UAE government to offer several advantages like better infrastructure and improved technology, which will in turn make UAE, a haven for businesses of all kinds.

The New VAT Regulations for Free Zones

There are nearly 45 free zones in UAE which extend several incentives and privileges to the businesses registered within its boundaries. The UAE govt has supported free zone company formation with the intention of boosting international trade by providing 100% ownership to expatriates and single window administration support.

Free zones, designated zones, and mainland areas will be treated differently under the new VAT regulations. The regulations state that only those UAE free zones which have fenced areas, proper security measures and have customs controls in place to monitor the entry and exit of individuals and movement of goods, shall be treated as designated zones. All transactions by companies inside designated zones, including importing, storing, and selling goods to countries outside the UAE, will be exempted from UAE’s VAT law.

Which Businesses are Exempt from VAT

Some businesses functioning inside the mainland or in non-designated zones are also exempted from VAT. These are:

• Certain health care services and associated goods/services.
• Some educational services and associated goods/services
• The first sale of new residential properties within 3 years of construction
• Investment grade metals like gold and silver.
• Transit charges to international markets and supplies related to it.
• Supplies of certain vehicles including aircraft and ships.
• Exports made outside GCC.

The Impact of VAT on Businesses

It is understandable that businesses are wary of the implementation of VAT. Since the maintenance of an office includes office rent, capital investment, water bill, electricity bill, printing and stationery charges, cleaning charges, among other expenses, the cost of maintaining the office is set to increase under the VAT regime. While the tax paid on such expenses should be recoverable with the VAT gained from sales, there could be a relative increase in working capital for about 1-2 months. Moreover, the tax can be recovered from the government only if the business is registered. For unregistered companies, the taxes paid on purchases would become an added overhead cost.

The hiccups are only expected to be short term. Long-term financial growth is expected to increase once VAT is implemented across the country. With a rapid growth expected for business setup in Dubai freezone, UAE will be able to cement its reputation as a global trading hub, linking the Middle East with the rest of Asia and the world, leading to increased prosperity for years ahead. With tax revenues burgeoning, the government can play a major role in greasing the wheels of a modern, globalised economy creating a win-win for the government and society as a whole. Moreover, companies operating from the designated free zones are exempted from VAT.

How will VAT affect Free Zones

If you thinking about company formation in uae freezones, there is some crucial information that you need to know. Apart from 20 designated zones – all other free zone companies are liable to pay VAT. These designated zones can be of multiple types. 1. The entire free zone is a Designated Zone and so all products inside will be without VAT. These types of zones will mostly be located near ports as they will hold products that are imported but then get exported directly affecting the UAE economy.2. Specific Areas within the Free Zone but not all of the Free Zone. Free Zones that produce goods are most likely to fall under this. Companies will need to store goods for the local market in designated warehouses after going through customs clearance.3. Firms in service-related Free Zones like Media City and Internet City will not be subject to any VAT as they are not liable to produce any goods.

VAT Exempted Free Zones in UAE

• Free Trade Zone of Khalifa Port
• Abu Dhabi Airport Free Zone
• Khalifa Industrial Zone
• Jebel Ali Free Zone (North-South)
• Dubai Cars and Automotive Zone (DUCAMZ)
• Dubai Textile City
• Free Zone Area in Al Quoz
• Free Zone Area in Al Qusais
• Dubai Aviation City
• Dubai Airport Free Zone
• Hamriyah Free Zone
• Sharjah Airport International Free Zone
• Ajman Free Zone
• Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port in Ajman
• Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road in Ajman
• RAK Free Trade Zone
• RAK Maritime City Free Zone
• RAK Airport Free Zone
• Fujairah Free Zone
• Fujairah Oil Industry Zone

UAE is expected to be the trendsetter for other GCC countries in VAT legislation. The Gulf region has been able to provide a tax-free environment for many years due to the revenue that they have obtained from oil reserves. Even though businesses prefer tax free regimes, the relatively less value of the VAT at only 5% and the exemption of designated zones will protect UAE from businesses fleeing due to the tax. While UAE has certainly not been a tax haven, it has offered a benign tax regime so far, allowing citizens and residents to retain most of their income. This will definitely change under the new VAT regulations.

A designated Free Zone company formation expert can clear all your doubts about VAT and ease your paperwork through the government without any hiccups. Get in touch with us to register your company in one of UAE’s Free Zones.