Introduction
Not all free zones are designated zones in the UAE.
A free zone in the United Arab Emirates (UAE) is a specific area designated by the government to attract foreign investment, promote economic growth, and encourage business activities. These free zones offer numerous benefits and incentives to businesses, including:
- 100% Foreign ownership: In free zones, foreign investors can own 100% of their businesses without the need for a local partner or sponso This used to be the number one reason to set up in a free zone, however this requirement was mostly eliminated from mainland set ups in Dubai and Abu Dhabi (not so in other Emirates yet) in 2021. The UAE Law that removed this requirement is Federal but it gave power to the Economic Departments to impose UAE national shareholding, in fact.
- Tax exemptions: Free zone entities are often exempt from corporate and personal income taxes for a specified period, typically ranging from 15 to 50 year.
- Customs duty exemptions: Goods imported into free zones are usually exempt from customs duties and tariffs.
- Simplified administrative procedures: Free Zones typically offer reduced red tape and streamlined processes for business set up, licensing and permits with state-of-the-art portals and customer service.
- Modern infrastructures: easy to use and adjustable to actual needs office space, warehouses and facilities tailored to specific industries.
- Strategic locations: Many free zones are located near ports, airports and major transportation hubs facilitating logistics and the flow of personnel.
- Access to skilled labor: Free zones often attract a diverse workforce and offer services to assist businesses in recruiting skilled professionals.
Examples of well-known free zones in the UAE include Dubai Multi Commodities Centre (DMCC), Jebel Ali Free Zone (JAFZA), Dubai Airport Free Zone (DAFZA), Abu Dhabi Global Market (ADGM), and Dubai Internet City (DIC), Ras Al Khaimah Economic Zone (RAKEZ), IFZA, SHAMS, etc. (30+). Each free zone may cater to specific industries, such as technology, logistics, finance, media, or manufacturing, others try to attract a more diverse pool of investors.
What is a Designated Zone?
Designated Zones are Free Zones that appear in the attachment of Cabinet Decision No. 59/2017on Designated Zones (“Cabinet Decision”) for UAE Federal Decree Law No. 8/2017 on Value Added Tax.
Article 1 of the Cabinet reads as follows:
The zones, which are designated in the Table attached to the present Decision and which meet the requirements indicated in Cabinet Decision No. 52/2017 on the Implementing Regulation of the provisions of Federal Decree-Law No. 8/2017 on the value-added tax (the “VAT Law”), shall be considered as zones designated for the purposes of the implementation of Federal Decree-Law No. 8/2017 aforementioned.
Article 50 of the VAT Law reads as follows:
A “Designated Zone” that meets the conditions specified in the Executive Regulation of this Decree-Law shall be treated as being outside the State.
These requirements are the following:
- The Designated Zone must be a specific fenced geographic area.
- The Designated Zone must have security measures and Customs controls in place to monitor the entry and exit of individuals and movement of goods to and from the Designated Zone.
- The Designated Zone must have internal procedures regarding the method of keeping, storing and processing of goods within the Designated Zone.
- The operator of the Designated Zone must comply with the procedures set out by the FTA.
The purpose of the above differentiation free zone vs designated zone arose as a consequence of the come into force of VAT in the UAE in January 2018. At this historical moment (first tax to enter the UAE scene) the need arose to differentiate between free zones as areas not considered as being part of the UAE vs. being in or out of the UAE with respect to the entry into force of the VAT regime.
Pursuant to the VAT law and regulations only designated zones receive or should receive special VAT treatment and always subject to the meeting of the conditions listed above. The goal is to continue to facilitate international trade with the entry into force of tax but not to enable free zones to avoid tax obligations.
What are the Free Zones qualifying as Designated Zones in the UAE?
Readers will be surprised to find that only 8 Free Zones in Dubai are qualified asa Designated Zones: JAFZA, DUCAMZ, Dubai Textile City, Al Quoz, Al Qusais, Dubai Aviation City, DAFZA, International Humanitarian City Jebel Ali.
In Sharjah: Hamriyah Free Zone, Sharjah Airport International Free Zone
In Ajman, Ajman Free Zone.
In Umm Al Quwain: Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port and Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road.
In Ras Al Khaimah: RAKEZ, RAK Airport Free Zone and RAK Maritime City Free Zone.
In Fujairah: Fujairah Free Zone and FOIZ
In Abu Dhabi: Khalifa Port Free Trade Zone, Abu Dhabi Airport Free Zone, Khalifa Industrial Zone, Al Ain International Airport Free Zone and Al Butain International Airport Free Zone.
Sharp readers and knowledgeable of the areas of focus of UAE free zones will have noticed that designated zones comprise zones that focus in trading not necessarily services. Services rendered within the UAE are fully subject to VAT as are goods traded within the UAE.
We focus at the main concepts differentiations at this publication. The field of tax and particular tax application are beyond the aim and scope of this publication.
We hope this publication will help you understand the concepts of Free Zones in the UAE and Designated Zones in the UAE and remain available for any questions regarding this post of general application.
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*The information on this page is not intended to be legal advice. This article is intended to provide an initial introduction to the concepts of free zones and designated zones in the UAE.