Abstract

The Draft Cabinet Decision on the Executive Regulation (the "Regulations") of the Value Added Tax ("VAT") Law (the "Law") has been published, with the effective date of VAT implementation confirmed as either 7am or the time of commencement of business on 1 January 2018. It should now be a matter of course till the final Regulations are published in the Official Gazette. Accordingly, the time for speculating about and procrastination over VAT implementation in the UAE is officially over.

Analysis

The uncertainty regarding whether or not VAT will be applied in the free zones has also been clarified by the release of the Regulations. Subject to the treatment of certain goods and services that are subject to a VAT exempt status, or are zero-rated in terms of the Law, the supply of all other goods and services will be taxable at the standard VAT rate of 5% throughout all free zones with certain exceptions under certain defined circumstances relating to and applicable in what the Law and Regulations refer to as "Designated Zones".

The Law defines a Designated Zone as "any area specified by a decision of the Cabinet upon the recommendation of the Minister, as a Designated Zone for the purpose of the Decree-Law". The Law further states that a Designated Zone "that meets the conditions specified in the Executive Regulation of this Decree-Law shall be treated as being outside the State". What does "outside the State" mean one may ask; the answer being that the VAT treatment of goods and services within such a qualifying Designated Zone will be treated as outside the scope of the VAT Law, and thus the supply will not attract VAT.

The Regulations state that Designated Zones will only be designated and remain so if they:

  • Comprise of a "specific fenced geographic area";
  • have satisfactory "security measures and Customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area";
  • demonstrate "internal procedures regarding the method of keeping, storing and processing of Goods therein"; and
  • follow all procedures as required by the Federal Tax Authority.

Analyzing the above provisions, it is clear that these Designated Zones are in line with the "bonded warehouse" concept in some foreign jurisdictions, where the receipt of goods into these "warehouse" areas from outside the receiving country are not considered as having been imported until the goods exit the secured area and into the country for consumption.

When applying the above provisions to the geography of the UAE, it is clear that the only areas that would qualify as Designated Zones are the free zones such as Jebal Ali Free Zone and the Dubai Airport Free Zone, however may also apply to Al Hamriya Port. The provisions blatantly exclude all "unfenced" free zones, and all trading activities in these free zones will be considered to be supplied "inside" the UAE and thus the supply of goods and services in these free zones will attract VAT and be subject to the Law.

The Law and the Regulations further clarify the VAT treatment of goods and services in Designated Zones where the supply of these goods and services are deemed to be supplied "inside" the UAE. Supplies of goods within the Designated Zones where the goods are consumed inside the Designated Zone shall be deemed to be supplied inside the UAE and be subject to the Law and attract VAT. There are exceptions to this rule, where the goods are not consumed but used in a manufacturing or production process, or sale of other goods in the same Designated Zone. The supply of services, water and any form of energy will attract VAT if the place of supply of the service, water or energy is in the Designated Zone irrespective of the local supplier's location.

Further interesting provisions are that the transfer of goods into a Designated Zone from "inside" the UAE, does not constitute an export of those goods, and also goods shall not be considered as having been imported into the UAE where they are imported into a Designated Zone from a place "outside" the UAE.

In conclusion, the Law and the Regulations are clear, free zones, by virtue of their status as free zones will not have any special exemptions or be excluded from the application of VAT in the UAE, unless they are classified as Designated Zones.

The matter is settled, so those free zone entities that thought VAT will not be applicable to them, take note: there are under eight weeks left to complete an up to eight-month or more VAT implementation project.

Previously published Lexis Middle East Law

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