Get Detailed About VAT on Free Zones in UAE

VAT on Free zones in UAE

UAE free zones are special economic zones which are free from many official government laws, including the Federal law and the Labour ministry laws. However, some of the laws, including the UAE criminal law are applicable in the free-zone regions.

Read more: VAT on Designated Zones Explained

The clarification about the application of the new VAT system in such free zones has not yet been made by the government. The UAE VAT Law, under article 50 to 52, covers these free zones, and the decision regarding the implementation of VAT in these zones is pending for the fourth quarter of 2017.

The concept of free zones has been very successful and popular in the country. Many new zones are being developed under the same mechanism to promote the growth and digitization in the UAE. These free zones are completely exempted from import and export taxes, income taxes, corporate taxes, etc., and have many other facilities like full repartition of capital and profits.

Read more:  20 Designated Zones Exempt From the VAT

Since the authorities have not yet made any decision about VAT in these free zones, let’s try to understand how it may affect the economy.

Let’s assume that the free UAE zones are exempt from the VAT. Then, the cost of things will be slightly cheaper in these zones as compared to the normal regions of the country.

This will largely impact those areas that are situated on the border or near the border of these free zones. People living near free zones in the UAE might see a difference in the prices of various things due to VAT in the remaining areas of the country.

The most significant effect will be on the prices of valuable entities like commercial properties. People will see a noticeable difference in the price of a property located in the free zone area and a property located just a few meters away in the normal area. This might further promote the growth of the onshore commercial environment.

However, it is being estimated that neither the free zones nor the businesses outside the free zones will be exempt from the VAT. There might be a special tax rate for the businesses situated in these free zones, as compared to the normal VAT rate of 5%. Some specific services and commodities, including duty-free goods, will be VAT free in bonded free zones. A bonded free zone is allowed to hold goods before duties are paid on them.

After the implementation of VAT in the country, many small and medium businesses might face a dip in the cash flow due to increase in tax liability. Although there is a provision of tax refund on inputs, there is no clarity on how long it might take for such refunds to process. Even if some businesses do not see the immediate effect on their cash flows, it will impact everyone sooner or later.

It is normal for refunds to be delayed when a new tax system is launched in a country. The government and the authorities are mostly busy in auditing the returns before they begin the refunding process. This is what delays the release of refunds to the involved businesses, which in turn, affects the cash flow in the market.

While the standard UAE VAT rate of 5% is lower as compared to many other economies in the world, the difference in tax liability within the country, such as special relaxation for businesses in the free zones, will impact the economy.

The new UAE VAT law mentions the concept of designated zones, but it is still not clarified whether the free zones will be kept under these Designated Zones or not. Therefore, it is also not clear how these free zones will be treated after the implementation of VAT in the country.

If free zones are kept under designated zones, they will be free of any VAT liability, as designated zones will be not covered under the VAT system. As per the UAE VAT Law, there will be no tax on the transfer of goods from one designated zone to another. However, the government might define some special conditions under which the businesses situated in a designated zone will still be liable to pay VAT.

It is being estimated that more information regarding this might be released by the fourth quarter of this year.

Each company within those categories must require a license from the free zone in UAE. An independent Free Zone Authority (FZA) is responsible to guide each free zone in UAE and issue FTZ license to them. Furthermore, FZA give some assistance to free zone members to commence its business in free trade zone (FTZ).

What are the Types & Functions of Free Zone in the UAE

There are some exemptions for free trade zones in UAE that are listed below:-

  • 100% foreign ownership of the enterprise
  • 100% import and export tax exemptions
  • 100% repatriation of capital and profits
  • Tax exemptions for 50 years on Corporate
  • Not Required Personal Income Taxes
  • Guidance with labor recruitment as well as additional support services including sponsoring and housing

With the help of an investor, any of the new company can register themselves under the Free Zone Establishment (FZE) in UAE. The companies can also establish a representative branch or office of the existing or parent company based within the UAE or abroad.

What is Free Zone Establishment (FZE)?

FZE is an acronym of Free Zone Establishment (FZE). The FZE is a limited liability company that has been controlled by the legal rules of the Free Zone under which it is being established.

The rules and regulations of the Commercial Companies Law (CCL) does not applicable to Free Zone Establishment (FZE) excluding obtaining citizenship in the UAE.

Some of FAQs regarding business established in the UAE Free Zones

What are the essential conditions for the capital investment in free zone?

The conditions may vary from business to business activities/ type and the rules imposed by the free zone.

What are the different types of business which I can be allowed to open in Free Zone?

There is no obligation – you can do any of the business in any field including financial, educational, retail, hospitality, media and more. It is advisable to consult respective authorities for establishing the business in a free zone in UAE.

What is the main aim to establish a business in the Free Zone in UAE?

For establishing a business in the Free Zone in UAE, generally, it requires less paperwork and duration. A step which helps to establish a business in a free zone:-

  • Select the type of business/ legal entity
  • Select the name of the business
  • Apply Application For Business License
  • Select a Space For Establishing Business
  • Get Approvals, Register For Business and Get License

What are the different types of legal regulations have been applied in the UAE Free Zone?

Two Types of Legal Regulations have been applied in the UAE free zone:-
Free Zone Limited Liability Company (FZ LLC) or Free Zone Company (FZ Co.)
Free Zone Establishment (FZE)

How much the capital investment is required to establish business in the UAE free zone?

It totally depends on the area of the free zone, however, the capital investment may vary from zone to zone

  • Abu Dhabi does not mention the minimum capital investment
  • You can open a limited liability company (LLC) where in the minimum paid-up capital is AED 150,000 is required in Khalifa Industrial Zone (KIZAD) in UAE
  • You can open a Free Zone Limited Company FZ Co. where in a minimum share capital of 1000 AED is required in Dubai to establish business at Airport Free Zone. Particular share should be in the denomination of 1000 AED.
  • To establish a free zone company the minimum share capital should be 50,000 AED in DMCC per company and 10,000 AED per shareholder. For establishing company, a General Trading Licence is required under which the company must have a minimum of AED 1 million share capital.
  • You can open a Forest Group Middle East (FZE) company with a minimum capital investment of AED 150,000 in Hamriya Free Zone in the UAE.

    How to select a trade name? Is there any specific rules?

An individual can select a trade name on the type of of legal entity they chosen for their business. Before selecting a trade name, it is advisable to cross check the respective free zone authority or the Department of Economic Development (DED) whether the name is already registered or not.
For instance, twofour54 Abu Dhabi is a trade name. In Abu Dhabi, you are not allowed to use the word ‘Abu Dhabi while selecting a trade name for the business and/or ‘United Arab Emirates’ in the name of the FZ-LLC or the branch

List of restricted trade names (DMCC):

A list of Restricted trade names available in Dubai Multi Commodities Centre (DMCC) Website that are mentioned below:-

The selected trade name would be approved by the Department of Economic Development (DED) when an individual fulfill the following requirements:-

1. An individual should not breach the public order or public morals of the country
2. An individual is entitled to follow the legal compliances of the company or example (LLC, FZE, DMCC etc.)
3. The same trade name must not be registered previously
4. Compatible with the required type of activity and legal status
5. The trade name neither include names of any religion, or governing authority nor logos of any external bodies

Which kind of business license have to apply for ?

It could be totally depend on the primary activity of your business. Here is a list of some types of business license:

  • Commercial/trade
  • Consultancy/services
  • Warehousing
  • Manufacturing
  • Industrial
  • Educational
  • Media
  • eCommerce
  • Offshore
  • Freelancer

What kind of business activities that are allowed to be opened in free zones of UAE?

Here is a list of the business activities you can open in the UAE free zone:-

  • Content Production
  • Advertising
  • Animation
  • Corporate Film Production
  • Corporate Print Material
  • Film Production
  • Gaming Development
  • Graphic Design
  • Illustration
  • Software Development (e.g. applications)
  • Songwriting And composing
  • TV Production
  • Web design and development (e.g. portal, search engine, community site, web production, online library)
  • Mobile media (e.g. content for interactive media services on mobile phones)
  • Music production and recording
  • Music video
  • Digital content production (e.g. CGI, 3D etc)
  • Educational content material
  • Photography/videography
  • Print content production (e.g. magazines, journals, periodicals, newsletters, guides, and handbooks etc.)
  • Radio content production
  • Script writing
  • Online electronic content production (e.g. websites, e-books, travel guides etc.)
  • Performing Arts and Theatre

Other Types of business include:

  • Branding Agency
  • Post Production (e.g. Film, TV, editing services)
  • Professional Association (e.g. non-profit)
  • Public Relations
  • Events/Festivals
  • Marketing Communications
  • Media content management (e.g. digital archiving)
  • Rights Management
  • Exhibitions/Conferences
  • Information Services (e.g. media related market research)
  • Training (media related)
  • Publishing and broadcasting
  • Book
  • Magazine
  • Newspaper
  • Broadcast a satellite/terrestrial radio channel

You have the option to choose from more than 600 business activities and nearly from 20 sectors including energy, commodities, gold and diamonds, technology, constructions, FMCG, healthcare, aviation, shipping, education, media, professional services, financial services and personal and community services in DMCC.

Apart from that, you can also establish a financial and non- financial business activities at the Dubai International Financial Centre (DIFC). Financial business activities consist of banks, insurance, wealth management and capital market, while non-financial business activities consist retail shops, restaurants, five-star hotels, art galleries and academic institutions.

How to obtain the office space in the lease in free zones?

There are two options to obtain office space – buy or lease. The office requirement totally rely on the number of employees and which kind of business activity you are dealing in.

The following Options are available in the Dubai Multi Commodities Centre (DMCC)

  • flexi desk of 20-30 sq. m.
  • flexi office of 200-265 sq. m.
  • offices running through multiple floors totalling up to 2,000 sq. m. each

In Dubai Airport Free Zone you can avail the following alternatives:-

  • Office Packages
  • Smart Desk Office Packages
  • Executive Office Packages

Hamriyah Free Zone Authority in the UAE renders nearly 100 executive offices lies in a range from 15 m2 to 42 m2 along with conferencing and internet facilities.

What essential documents are required for initial approval, registration, licensing and visa process?

Each of the free zones have their own rules and regulations, though the companies those are operating their business in these free zones are liable to follow these rules and regulations. A list of essential documents and requirements may vary from type of business activity, company and free zone authority.

A list of Documents required for Initial approval are mentioned below:-

A. Initial approval

  • Finished application form
  • Business Plan
  • Copy of existing trade licence/registration certificate (in case you are an existing company, applicable for local company only)
  • Coloured passport copies of the company’s shareholder/s and the appointed Manager/Director for the new company
  • Specimen signature of the company’s shareholder/s and the appointed Manager/Director for the new company
  • 2 years’ audited financial reports for the corporate entity or certificate of reference from a personal bank of the individual shareholder
    NOC from a current sponsor (for individuals)
  • Unit title deed
  • Letter of Intent
  • Registry Identification Code Form (RIC) for Manager/Director (Original and notarised)

B. You must be required following documents for freelancers

  • Application for registration
  • CV
  • Bank reference letter
  • Registry Identification Code Form (RIC) (Original and notarised)

C. Licensing and Visa process

  • After the submission of necessary documents, the lease agreements would be formulated by the authority
  • Trade License Will be Issued
  • Finally, Visa Process Will Commence

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