Services in Designated Zones

Services in Designated Zones

The Key Principle

Designated zone status applies only to goods. For services, the normal place of supply rules apply — the location of the designated zone is irrelevant.

What This Means

• A service provided by a designated zone company to a mainland company: standard-rated at 5% (if the recipient is in the UAE).
• A service provided by a mainland company to a designated zone company: standard-rated at 5% (if the recipient is in the UAE).
• A service provided by a designated zone company to a non-UAE recipient: may be zero-rated (export of services).

Why the Distinction?

Designated zones exist to facilitate trade in physical goods (customs suspension, duty-free storage). Services are not physical goods and do not pass through customs, so the designated zone concept does not apply.

Practical Implications

1. Free zone businesses providing services: Must charge 5% VAT on services to UAE recipients, even though their goods transactions may be outside the scope.
2. Free zone businesses receiving services: Must account for reverse charge VAT on services from non-residents, same as mainland businesses.
3. Mixed businesses: A free zone company that sells both goods and services must apply different VAT treatments — goods follow designated zone rules, services follow normal rules.

Common Misconception

Many free zone businesses assume they are "VAT-free" for all transactions. This is incorrect — only goods transactions within and between designated zones are outside the scope. All services are subject to normal VAT rules.