On 1 January 2018, laws imposing a VAT on the supply of goods and services in the UAE came into effect. In this article, we provide you an overview of the VAT scheme and explain in which circumstances it applies, including highlighting regulations made last month which finally clarify the VAT-status of the UAE Free Zones.
What is VAT?
VAT stands for “Value Added Tax” and is a tax which is levied on the provision of goods and services. VAT is generally charged at each point of sale where value has been added – beginning with raw materials through to final retail purchase. Ultimately, the consumer pays VAT; buyers earlier in the value chain receive reimbursements for previous VAT paid. More than 160 countries around the world use value-added taxation, and it is most common in the European Union. Rates worldwide can vary greatly but are generally between 5% and 20%.
The UAE’s new VAT Law
Historically, Vale Added Tax was not levied in the UAE, nor in any of other GCC countries. However, as we reported last year, on 30 January 2017 the GCC approved a unified agreement to implement VAT throughout all GCC member states in the following year. On 23 August 2017, the UAE published Federal Decree Law No. 8 of 2017 on Value Added Tax (VAT Law) giving effect to the GCC agreement. The VAT Law commenced operation on 1 January 2018.
Under the VAT Law, suppliers must register for VAT if their taxable turnover exceeds the mandatory registration threshold of AED 375,000 in a 12-month period, or if they expect their taxable turnover to exceed AED 375,000 in the next 30 days. VAT will apply at a standard rate of 5% on the supply of taxable goods and services in the UAE (including imports).
While most goods and services will be subject to Value Added Tax, certain categories of goods and services are either “exempt supplies” or are “zero-rated”. Exempt supplies are excluded from the Value Added Tax scheme entirely – they do not attract any VAT and they do not count towards taxable turnover for the purposes of VAT registration. Examples of exempt supplies are financial services and residential buildings where not specifically identified as zero-rated. “Zero-rated” supplies, on the other hand, are still subject to the VAT scheme, but charged at a rate of 0%. Suppliers must still include these supplies in their tax return, and they are included for the purpose of determining whether a business meets the mandatory registration threshold for registration. Further, unlike exempt supplies, suppliers of zero-rated goods and services can reclaim all of their input VAT. Examples of zero-rated services include exported goods/services, international transport, certain investment precious metals, and certain healthcare and educational services.
The VAT and the UAE Free Zones
The UAE has a number of established free-trade zones called Free Zones, centred on particular industry categories, which have their own special tax, customs and imports regimes and are governed by their own regulatory framework. The Zones offer a range of tax and other commercial incentives to encourage investment, such as corporate and income tax exemptions and permissive foreign ownership provisions. Free Zones exist in a range of Emirates, with prominent examples being the Jebel Ali Free Zone and the Dubai International Financial Centre in Dubai, the RAK Free Trade Zone in Ras Al Khaimah, and the Khalifa Port and Industrial Zone in Abu Dhabi. There are some 37 Free Zones in Dubai, with a range of new ones under ongoing development.
An important question for many after the VAT was announced was how the tax was to interact with existing Free Zones – would those Zones also be subject to VAT or remain exempt? Even after the UAE Law was issued, considerable uncertainty remained. The VAT Law stated that “Designated Zones” would be treated as being outside of the UAE for the purpose of the VAT (i.e. exempt from its operation). However the term “Designated Zone” was left to be defined in later regulations.
Last month, a Regulation relating to the definition of Designated Zones was finally passed. Cabinet Decision No. (59) of 2017, issued on 11 January 2018, has now made it clear that Free Zones will be exempt from the applicability of the VAT. The Regulation provides a list of only 20 Zones which are to be considered as “Designated Zones” for the purposes of the VAT Law and hence exempt from its requirements. Notable inclusions on this list are the Khalifa Port and Industrial Zones, the Jebel Ali Free Zone, the Dubai Airport Free Zone, and the RAK Free Trade Zone. Any Free Zones not on the list, however, are not currently exempt from VAT, which means that businesses within those Zones must take steps to become compliant with the legislation.
Where to go from here
If your business may be subject to the new VAT scheme, it is important to seek confirmation and appropriate advice as a matter of priority. Deadlines for registration have already begun to run; after 1 January 2018, businesses which qualify for mandatory VAT registration must do so within 30 days of being qualified, or penalties may apply. The Federal Tax Authority has issued a list of official FAQs that can help you with the registration process. We are also available to assist with the VAT registration at the Federal Tax Authority and to answer any queries related to the VAT process and compliance.