UAE was only known as one of the many oil export nations from the Middle East. But over the years it has diversified its portfolio and is gradually shifting its reliance from oil exports to tourism and industrialization. One of the many ways it is promoting industrialization is through Designated Freezones.
We already know that UAE and particularly Dubai is slowly becoming a cultural hub of the world. But what many people forget to see is the fledgling yet flourishing manufacturing and trade industry that has been made possible with the creation of Freezones and Designated Freezones.
In this guide, you will not only learn what they are but also learn about the tax policies applied in these zones and the many advantages of operating your business in these zones.
What is a Designated Freezone?
Designated Freezone is an area in the United Arab Emirates that is exempt from the Value Added Tax that is applicable to goods and services in the rest of the country. These zones are generally considered outside the boundaries of the UAE for tax purposes even though they are physically located inside the country.
These zones come with other incentives as well and are created to promote trade and attract foreign investment. When it comes to the application of tax it may apply to them under special circumstances and this will be explained below.
Criteria for Identifying a Designated Freezone
There are certain characteristics that define a Designated Freezone as per UAE’s trade laws and they are as follows.
- A Designated Freezone is considered a gated territory meaning it is enclosed in a fence, not just as a security measure but also to provide customs control.
- It has to follow strict guidelines when storing, transporting, and processing goods.
- It must maintain strict customs control and monitor all the goods and personnel going on and off the premises of the Freezone.
- Lastly it should comply with the tax laws and procedures set forth by the Federal Tax Authority of UAE.
These rules are applicable to all the businesses operating in these zones.
Distinction between a Freezone and a Designated Freezone
People often mix Freezones with Designated Freezone and there is a difference between the two. While they both follow the same basic principle they differ in a few ways and those are as follows.
| Freezone | Designated Freezone |
| These are special zones created by the UAE government to provide incentives to businesses like, tax breaks and relaxed regulations. | These zones are Freezones that enjoy additional tax benefits and may follow different rules and regulations than a traditional Freezone. |
| Not all Freezones are Designated Freezones. | All Designated Freezones are Freezones. |
| A Freezone doesn’t have to be fenced. | A designated Freezone has to be fenced. |
| A Freezone is considered a part of UAE territory. | A designated Freezone is considered to be outside the UAE territory for tax purposes. |
| There are 46 Freezones currently in UAE and the number changes from time to time. | There are 24 designated Freezones currently in UAE and again the number is subject to change. |
How is VAT applied in a Designated Freezone?
Value Added Tax or VAT was introduced in the UAE at the start of 2018 and while Designated Freezones are generally exempt from paying VAT, they may have to pay under certain conditions. The overall VAT policies are as follows.
- If goods are being transferred inside a Designated Freezone or between two zones then they are exempted from VAT as long as they comply with the regulations.
- If goods are being imported from or exported to companies overseas or outside UAE territories then they are exempted from VAT, again if they comply with the regulations.
- However, if goods are being imported or exported to the mainland UAE and Freezones then they are subject to a 5% VAT.
- In the case of services, if the services to the Designated Freezone are supplied from or given to the mainland then they are subject to the 5% VAT.
- However, if services are imported or exported from outside UAE then they are exempt from Value Added Tax.
Advantages of Operating in a Designated Freezone
Besides the usual advantage of not having to pay any VAT, there are several other advantages as well of operating a business in one of the zones.
- Friendly rules and regulations: As mentioned before the whole purpose of these zones is to support business and invite outside investors. One way the UAE government does this is by easing rules and regulations which helps cut the bureaucracy and streamline the whole process.
- No Customs Duty: Besides having to pay no VAT (conditions apply) another thing that businesses operating in a designated freezone are exempt from is the customs duty being levied on goods being transferred in and out of these zones, here again, conditions apply.
- Streamlined Customs Process: Another advantage of operating in these zones is that the customs process is made easier for business. The transfer of goods from these zones, which would otherwise have to go through hours of customs checks is made a lot easier and faster.
- Reduced Costs: Having to pay no taxes and customs duties, significantly reduces the price of goods and services in a freezone, which is advantageous to not only the business operating in these zones but also to everyday people who will eventually buy these goods and services.
List of Designated Freezones in UAE
Here is a list of the prominent Designated Freezones in each of the Emirates in UAE.
Dubai
- Jebel Ali Free Zone(North-South).
- Dubai Textile City.
- Free Zone Area in Al Quoz.
- Dubai Cars and Automotive Zone. (DUCAMZ)
- Dubai Aviation City.
- Dubai Airport Free Zone.
- Free Zone Area in Al Qusais.
Abu Dhabi
- Free Trade Zone of Khalifa Port.
- Khalifa Industrial Zone.
- Abu Dhabi Airport Free Zone.
In Ras Al Khaimah
- RAK Free Trade Zone.
- RAK Airport Free Zone.
- RAK Maritime City Free Zone.
In Sharjah
- Hamriyah Free Zone.
- Sharjah Airport International Free Zone.
In Umm Al Quwain
- Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port.
- Umm Al Quwain Free Trade Zone on Sheikh Mohammed bin Zayed Road.
In Ajman
- Ajman Free Zone.
In Fujairah
- Fujairah Free Zone.
- Fujairah Oil Industry Zone (FOIZ).
