If you are wondering that there are areas that are absolutely VAT (Value Added Tax) free in UAE, you need to clear your idea.

The concept of a free zone in UAE has definitely been around for a while and lets several international companies trade with the country without much of restrictions. There are places where international companies can have a business without paying VAT.

However, with some new changes that will start levying from January 1, 2018, there is quite a lot of confusion around what Free Zone is and what VAT Free Zone is.

As per pre-legislation, the Designated Zones that are VAT free have been incorrectly assumed to be Free Zone by many. Know the real law set by the UAE Executive Regulation for Excise Tax about the ‘Designated Zone’ that can be VAT free.

Conditions met by a Free Zone:

• It has security measures to restrict an entry or exit of people and movement of products to and from Designated Zone.
• Designation Zone is governed by Customs department.
• There is a warehouse for Designated Zone.

The Designated Zones doesn’t necessarily have to fall under the Free Zone, but it has to meet conditions like:

• It has a specific geographic area
• It follows security measures to restrict entries and exits of people, movement of products to or from that area, and this is specified by law. It can also be a controlled warehouse that is not close to a Free Zone or in the Free Zone.
• There has to be a warehouse attendant for security.

Three classifications of Free Zones

• The Free Zones are Designated Zones for VAT and all the products inside it will not have VAT. These zones are much likely to be close to ports as they hold products for import but then they are exported without coming into any free circulation of UAE economy.
• There are Specific Areas in the Free Zones that are not entirely free. These places are a part of the Free Zones that deal with goods as many companies are likely to have a warehouse within their Designated Area, and often outside of that area too. This way, one warehouse is custom cleared while the others are not. The warehouse in the designated zone is called the ‘bonded’ warehouse. It can be quite a problem for many organizations as their goods will be stored in bonded warehouses and need to get customs clearance for selling locally. There will also be no shipments made until customs have taken place. The process slows down business and increases costs.
• There are Free Zones that don’t have Designated Zones. For example, The Internet City and the Media City. There are no advantages to have bonded warehouses where the transactions are more service related and not product related.

These updates will help any aspiring businessman or people who want to clearly know the real deal related to VAT Free Zones. It is always better to pay VAT as it comes with fewer liabilities in the long-run.