Is VAT charged on goods sold within a free zone?

Article 51 – Designated zones30 1. Any Designated Zone specified by a decision of the Cabinet shall be treated as being outside the State and outside the Implementing States, subject to the following conditions: a. The Designated Zone is a specific fenced geographic area and has security measures and Customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area. b. The Designated Zone shall have internal procedures regarding the method of keeping, storing and processing of Goods therein. c. The operator of the Designated Zone complies with the procedures set by the Authority. 30 Article amended as per Cabinet Decision No.88 of 2021. Cabinet Decision No. 52 of 2017 and its amendments – As published by the Ministry of Finance 39 2. Where the Designated Zone changes the manner of operating or breaches any of the conditions based on which the area was specified as a Designated Zone under a decision issued by the Cabinet, the Designated Zone will be treated as if inside the State. 3. The transfer of Goods between Designated Zones shall not be subject to Tax if the following two conditions are met: a. Where the Goods, or part thereof, are not released, and are not in any way used or altered during the transfer between the Designated Zones. b. Where the transfer is undertaken in accordance with the rules for customs suspension according to GCC Common Customs Law. 4. Where Goods are moved between Designated Zones, the Authority may require the owner of the Goods to provide a financial guarantee for the payment of Tax, which that Person may become liable for should the conditions for movement of Goods not be met. 5. Where a supply of Goods is made within a Designated Zone to a Person to be consumed by him or another person, then the place of supply of these Goods shall be in the State except in any of the following cases: a. The purpose was to incorporate the Goods into, attach the Goods to, or that the Goods become part of or are used in the production of another Good in the same Designated Zone and such Good is not consumed. b. The Goods were delivered to a place outside the State, and the Supplier retains supporting commercial or official evidence proving that, and customs evidence proving that the Goods were removed from the Designated Zone. c. The Goods were moved from the Designated Zone to a place inside the State, and the Supplier retains official evidence establishing that VAT had been applied on that import. 6. The place of supply of any Services is considered to be inside the State if the place of supply is in the Designated Zone. 7. As an exception to Clause 6 of this Article, the place of supply of any services shall be outside the State, where shipping or delivery services are supplied directly in connection with Goods that have a place of supply outside the State according to paragraphs (b) and (c) of Clause 5 of this Article, and all of the following conditions are met: a. Shipping or delivery services are supplied by the same supplier of the Goods; b. The supplier of the Goods is a Non-Resident, and not registered for Tax; c. These Goods are sold via an Electronic Sales Platform; an Electronic Sales Platform refers to any type of online sales platform, including websites and Cabinet Decision No. 52 of 2017 and its amendments – As published by the Ministry of Finance 40 electronic applications, which brings together third-party sellers and buyers, and through which Goods may be sold and purchased with or without shipping or delivery services; d. The person owning the Electronic Sales Platform is not the supplier of the Goods. 8. The Place of supply of water or any form of energy shall be considered to be inside the State if the place of supply is in a Designated Zone. 9. Goods located in a Designated Zone which the owner has not paid Tax on will be treated as Imported into the State if: a. The Goods are consumed by the owner unless they are incorporated into, attached to or otherwise form part of or are used in the production of another Good located in a Designated Zone which itself is not consumed. b. There is shortage in Goods. 10. Any Person established, registered or which has a Place of Residence in a Designated Zone shall be deemed to have a Place of Residence in the State for the purposes of the Decree-Law. Title Ten – Calculation of Due Tax

Scenario Phase 1 VAT treatment Phase 2 of Phase 1 VAT treatment of Phase 2  Goods are imported from DZ into mainland  The goods are sold in the mainland by the importer  Goods are sold within DZ and the goods will not be consumed by the purchaser  The goods are imported into the mainland by the purchaser  Goods are sold within DZ and the goods are intended to be consumed by the purchaser  The goods are imported into the mainland by the purchaser Import of goods from DZ into mainland Import VAT due from the importer Sale of goods in the mainland Supplier charges VAT on sale if a taxable supply Sale of goods within DZ Outside the scope of VAT Import of goods from DZ to mainland Import VAT due from the importer Sale of goods within DZ Supplier charges VAT on sale Movement of goods from DZ to mainland Import VAT due from the importer (but can be recovered via the VAT return) 3.6. Subsequent consumption or loss of goods In all cases, goods which are located in a Designated Zone on which the owner has not paid VAT will be treated as imported into the UAE where:  the goods are consumed by the owner, unless the goods are incorporated into, attached to or otherwise form part of or are used in the production of another good located in a Designated Zone and that other good is not itself consumed12; or  the goods are unaccounted for13. These provisions apply to the owner of the goods. 12 Article 51(4) and (8)(a), VAT Executive Regulations. 13 Article 51(8)(b), VAT Executive Regulations. Page 14 VAT Guide | Designated Zones | VATGDZ1

9.3.2. VAT-free imports The second type of goods which are relieved from import VAT are goods which are exempt from customs duties in accordance with the GCC Common Customs Law. These are: 1. goods imported by the military forces and internal security forces; 2. personal effects and gifts accompanied by travellers; 3. used personal effects and household items transported by UAE nationals living abroad on return or by expats moving to live in the UAE for the first time; and 4. returned goods. Goods falling under any of these categories are treated as having been imported into the UAE but are exempt from the imposition of VAT. 9.4. Designated zones Certain free zone areas in the UAE will be selected as “designated zones”. Such areas are treated as outside the UAE for the purposes of supplies of certain goods. In summary, the following rules apply to supplies related to designated zones. Type of supply VAT treatment A supply of goods within one designated The supply is treated as made outside zone. the UAE, unless one of the exceptions in this table apply. A supply of goods within a designated The supply is treated as made in the zone to be used by the recipient or by UAE. another third person, unless the goods are to be incorporated into, attached to or otherwise form part of or are used in the production or sale of another good located in the same designated zone which itself is not consumed. A transfer of goods between two different Treated as a supply outside the UAE if all designated zones. of the following conditions are met:    33 the goods, or any part of the goods, are not released into free circulation during the transfer; the goods, or any part of the goods, are not used or altered in any way during the transfer; and the transfer is undertaken in accordance with the rules for customs suspension according to the GCC Common Customs Law. VAT Guide | Taxable Person | VATG001