According to the FTA, the newly-added free zones are Al Ain International Airport Free Zone, Al Bateen Executive Airport Free Zone in Abu Dhabi, and International Humanitarian City - Jebel Ali in Dubai. The treatment of these areas as designated zones was effective from June 18, 2018.
Thomas Vanhee, partner at Aurifer Middle East Tax, said businesses that have transactions in the new designated zones will be relieved that no VAT applies on the supplies of goods inside the designated zones with some exceptions.
"Some businesses in these designated zones may potentially now deregister for VAT purposes. It will be important for them to assess again their transactions in the zone and determine which ones are actually subject to VAT and which ones are not. Although this constitutes an important relief, the transactions with designated zones can be complex," said Vanhee.
Currently, eight designated zones are located in Dubai, five in Abu Dhabi, three in Ras Al Khaimah, two each in Fujairah, Sharjah and Umm Al Quwain, and one in Ajman.
International Humanitarian City, which is to be the largest humanitarian hub in the world with the most diverse members, has 70 members including nine UN agencies, 48 non-profit organisations and 13 commercial members. Currently, over 45 free zones are across the country.
Exports from the UAE's free zones totalled Dh225.5 billion in 2017, a growth of 6.6 per cent from the previous year, according to the Central Bank of the UAE data. That amounts to 19.5 per cent of the UAE's total exports recorded last year.
The UAE houses one of the highest number of free zones globally at 45 with another 10 under construction. Dubai now houses around 30 free zones.
Nirav Shah, director at Fame Advisory, said all companies in the free zones will be able to avail VAT benefits for all goods that were not to be used within the UAE since all transactions within designated zones for goods movement is outside the scope of five per cent VAT.
Technically, Shah said, the Cabinet can add more free zones, because tge VAT law says that free zones with customs-restricted access will qualify for this, so if any other free zone infrastructures are developed and meet this criteria, those can also be included in the designated zones.
According to Mayank Sawhney, director at MaxGrowth Consulting, the Cabinet decision had said earlier that designated zones can be added or removed from the list.
"In the future, more free zones can be added if they fulfill the criteria of designated zones such as custom control, fenced boundaries and controlled movement of goods going in and out of it," Sawhney said.
He pointed out companies from specific sectors are increasingly looking at moving into one free zone as it benefits them from cash-flow perspective because they are heavily involved in bilateral trade and dealings.
"In Dafza [Dubai Airport Free Zone], there a number of mobile phone companies that are engaged in buying and selling to each other. So, having a presence in one designated zones will not block their cash flow," he added.
FTA issues more clarification on labour accommodation
Meanwhile, the FTA also issued clarification about the issue of the applicability of five per cent VAT on labour accommodations.
"In the initial period, there was confusion whether labour accommodation is chargeable or not. Subsequently it was clarified by the FTA that labour accommodation is treated as residential property and hence exempt from VAT. In essence, where additional services such as cleaning, Internet etc. are provided as part of the composite labour accommodation service, there is a single pricing and it is provided by the same supplier, it will be treated as residential property and will be exempt from VAT," said Girish Chand, director at MCA Management Consultants.
He also pointed out that where the labour accommodation is a mixed supply consisting of various elements and it is charged separately, the tax treatment of each component will have to be determined separately.
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