The Designated Zones are special zones for VAT purposes which are generally considered outside of the UAE for VAT purposes. While VAT applies throughout the UAE, in the Designated Zones VAT generally does not apply. Only fenced free zones with special controls on goods and services going in and out could benefit from this status. As expected, important free zones such as JAFZA, DAFZA and KIZAD are on the list.
Although the UAE VAT law foresees this special regime, businesses that had transactions with these free zones were in the dark until 9 January 2018. Although the FTA had announced that the Designated Zones for VAT would be somewhat similar to those for Excise Taxes, in absence of any published cabinet decision, there was no legal basis not to apply VAT on imports into the free zones.
During today the IT systems of the customs authorities will now be adapted to take into account the new reality.
The wait for these decisions has caused a lot of confusion with importers, exporters, clearing agents and forwarders. In addition, today there are still many businesses which have their shipments blocked in the ports of Dubai and Abu Dhabi due to IT issues between the FTA and the customs authorities.
The other long awaited cabinet decision is on medical supplies. Certain supplies of medication and medical equipment which are registered with the Ministry of Health can benefit from a zero rate. This however does not extend to services related to medical equipment although hospitals often rent equipment. The practical issues with registering goods with MoH shall now also have a tax impact.
Both decisions work retroactively back to 1 January 2018. This means that quite a number of invoices need to be corrected, as VAT will have been applied on certain imports and sales in the DZ’s and on medical supplies. Unduly invoiced VAT is not deductible.