UAE Federal tax authority (“FTA”) revises the VAT rules regarding “Designated zones”.

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FTA issued Cabinet decision No. 88 of 2021 amending the executive regulations of the UAE VAT law effective from 30th Oct 2021.
In order to avoid double taxation on goods supplied from a designated zone (“DZ”), and to provide registration relief to non-resident suppliers who also ship or deliver these goods, Article 51 of the VAT executive regulations has been amended.
Further, FTA also issued a public clarification (VAT P027) to provide guidance on goods supplied in a Designated zone and connected shipping or delivery services.

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Below are the key highlights of the clarification:

Qualifying goods: The supply of goods in the designated zone is outside the scope of UAE VAT if the goods are consumed outside the designated zone, provided evidence is obtained and retained that the goods were delivered to a place outside the UAE; or VAT was paid on the importation of those goods into the UAE.
As a general rule goods supplied in Designated Zone (as per FTA approved list of designated zones) will be considered as supply outside scope of UAE vat, however if these goods are intended consumed in UAE, then it will be considered as supplied in UAE and normal vat rule will apply.
The resale of purchased goods is not treated as consumption of the goods, if purchaser intends to sell them.
Place of supply of goods will be considered as being outside the UAE if it satisfies any of the following condition.

A. If goods are used in production (incorporated/attached to/become part of/ are) of another good within designated zone, for this exclusion.
• There has to be direct connection between purchased goods and final product after production.
• And that final product should not be supplied to be consumed.

B. If goods are delivered to a place outside UAE and company keeps custom evidence along with the official and commercial evidence. For this exclusion:
• Goods have to move from DZ to Outside UAE.
• Custom Documents showing movement of goods should be obtained and kept in record.
• The supplier should retain commercial or official evidence that the goods were delivered to a place outside the UAE.

C. Goods are moved from DZ to UAE mainland – in this case where goods will be moved from DZ to be delivered in UAE, consumption would generally be regarded as taking place in UAE and further VAT would be levied on import of goods, resulting in potential double taxation. Hence, executive regulations have amended for place of supply for this transaction to be considered as outside the UAE if certain requirements are met. For this exclusion:
• Goods has to move from DZ to be delivered in the UAE; and
• The supplier should retain official evidence (stamped import declarations issued by customs) that the goods were imported; and
• Evidence that VAT has been paid on that import.

In above cases it is the responsibility of the supplier to ensure that it treats a supply correctly in their VAT return and obtains and keeps all the necessary documents in record.
If any of the above conditions are not met and proof are not kept in record in such case transaction will be treated as within the scope of UAE VAT and subject to 5% VAT (unless qualifies for zero-rating).

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Shipping and delivery services: As a general rule place of supply any service will be UAE even supply is made in Designated zone, however as per amendment in Executive regulation shipping or delivery services supplied directly related to “Qualifying Goods” will be outside the scope of UAE VAT if the following conditions are fulfilled:
A. Shipping or delivery services are supplied by the same supplier of the Goods
B. The supplier of the Goods is a Non-Resident, and not registered for VAT in UAE;
C. These Goods are sold via an Electronic Sales Platform.
D. The supplier of the goods is not the person owning the electronic sales platform.

Due to this amendment, Non-Resident suppliers who are not registered for VAT will not be required to register if they only sell the goods to which the above mentioned exceptions apply, on an electronic sales platform, and they ship or deliver these goods to customers.

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This document is only for information purposes and should not be construed as an advice. It does not necessarily cover each aspect of the topic with which it deals. You should not act upon the contents of this document without receiving formal advice on your particular circumstances.

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