Is VAT applicable to free zone companies in the UAE?

Yes, Value Added Tax (VAT) may be levied on free zone companies in the UAE, subject to certain factors like the nature of the business activity, the location of the free zone, and whether the company is engaged in transactions in or outside the UAE.

VAT Treatment of Free Zone Companies

1. Designated vs. Non-Designated Free Zones

   The UAE Federal Tax Authority (FTA) classifies certain free zones as "Designated Zones", and they are treated as being outside the UAE for VAT. The intra-group transactions of goods between firms in a Designated Zone may not be subject to VAT. However, the services of businesses in these zones are generally subject to taxation. Non-Designated Free Zones, on the other hand, follow standard VAT rules as applied in the UAE.

2. Transactions In the UAE

   When a free zone business supplies goods or services to the mainland UAE, VAT at the standard rate (currently 5%) would normally apply.

   When a free zone business brings goods into the UAE, VAT is usually due under the reverse charge mechanism.

3. International Transactions

   Supply of goods from a free zone to an overseas customer is normally zero-rated.

   Export of services to a customer outside the UAE may also be zero-rated where specific conditions determined by the FTA are met.

4. Compulsory VAT Registration

   A free zone business must register for VAT where its taxable turnover exceeds the mandatory registration threshold as determined by the UAE tax authorities. Alternatively, voluntary registration could be undertaken at the lower voluntary threshold when turnover reaches it.

In short, free zone businesses must ascertain their VAT obligations based on their business and customers' locations. It is essential to comply with VAT regulations to avoid penalties. Considering the likelihood of tax law changes, it is highly recommended that a professional tax consultant be consulted.