Overview
- Your Designated Zone status determines your VAT position, and only for goods
- All services are taxed at 5% regardless of the region you operate in
- VAT can arise without a traditional sale when a transaction qualifies as a deemed supply or a related-party transfer
- Starting from 2027, mandatory e-invoicing will expose inconsistencies in VAT returns
A free zone licence and a VAT exemption are two separate things. UAE VAT for Free Zone companies comes down to three factors: your zone’s status, your supply type, and your customer base.
Why Designated Zone Status Matters More Than Your Free Zone
Only free zones named in a Cabinet Decision qualify as Designated Zones for VAT. Listing alone is not enough: the area must also operate security and customs controls and meet FTA requirements. All other free zones are treated as part of the mainland.
This is why three of Dubai’s best-known free zones hold different VAT positions. Jebel Ali Free Zone (JAFZA) and Dubai Airport Free Zone (DAFZA) are named in the Cabinet Decision. Dubai Multi Commodities Centre (DMCC) sits outside the list and therefore follows mainland VAT rules, contrary to common assumption.
Assuming a zone’s status is a compliance risk. You should confirm it against the Cabinet Decision and check that all activity takes place within the customs-controlled area.
VAT Scenarios for UAE Free Zone Companies
| Scenario | VAT treatment |
| Goods moving between Designated Zones | Generally outside the scope, provided all conditions set by the FTA are met. |
| Goods leaving a Designated Zone for the mainland | 5% VAT is accounted for by the importer. |
| Goods consumed within a Designated Zone | Treated as supplied in the UAE and are taxable at the standard rate of 5%. |
| Supplies from a non-designated free zone | Treated as supplies from the mainland, taxable at 5% unless an exemption applies. |
| Services supplied to UAE customers, from any zone | 5% VAT applied in all zones. |
Source: FTA Designated Zones VAT Guide
Deemed Supplies & Their VAT Implications
Under VAT Decree-Law, goods or services on which input tax was recovered are treated as supplied if they are later given away, used for non-business purposes, or retained on deregistration.
Internal consumption within a Designated Zone
Goods remain outside the scope of VAT only while they are held for onward trade. Once they are consumed within the zone, in operations rather than resale, they become taxable.
Transfers between Related Entities
Group companies outside a single VAT group must account for VAT on supplies made to one another. Where the price falls below market value, and the recipient cannot recover the VAT in full, the value of the supply is taken to be market value. This makes defensible intercompany fees a VAT concern as well as a corporate tax one.
Your Zone Doesn’t Change VAT on Services
Designated Zone relief applies to goods alone. For services, the zone remains irrelevant. For consulting, management and professional services firms, this means:
- 5% VAT on fees to UAE clients, including clients based in other free zones and in Designated Zones.
- Mandatory registration once taxable supplies and imports exceed AED 375,000.
- Zero-rating is limited to qualifying exports, where the client is outside the UAE, and the conditions are fully documented.
Partial Exemption & Input Tax Apportionment
If some of your income is VAT-exempt, such as from residential leasing or certain financial services, you recover only part of your input VAT. VAT on costs linked to taxable supplies is recoverable, VAT on costs linked to exempt supplies is lost, and VAT on shared overheads is apportioned. Cabinet Decision No. 149 of 2026 revises this method from the first tax year starting after 1 October 2027.
Certain input VAT is lost permanently, regardless of the revenue mix:
- VAT on costs attributable to exempt supplies.
- VAT on blocked expenses, including client entertainment and motor vehicles available for personal use.
- VAT on cash payments above thresholds to be set by the Ministry of Finance.
- Excess recoverable VAT that is not used or reclaimed within five years, under amendments effective 1 January 2026.
How Will FTA Use E-Invoicing Data?
E-invoicing becomes mandatory on 1 January 2027 for businesses with annual revenue of AED 50 million or more, and on 1 July 2027 for all others. Accurate invoicing in Dubai now matters more than ever.
Inconsistencies likely to prompt review include:
- Input tax claimed without a matching supplier e-invoice.
- Designated Zone treatment that the counterparty’s records don’t reflect.
- Intercompany charges missing or valued differently on each side.
- Input tax on supplies linked to tax evasion, which the FTA can deny since 1 January 2026.
Self-Assessment Framework
- Is the free zone named in the Cabinet Decision, and does the activity take place within its customs-controlled area?
- Does the business supply goods, services, or both?
- Are customers located in Designated Zones, on the mainland, or overseas?
- Does the business have exempt revenue, related-party flows, or non-business use of assets?
Advantia can help you confirm your free zone’s VAT status, review how your supplies and related-party transactions are treated, and prepare your VAT position for mandatory e-invoicing.
Only free zones listed as Designated Zones in a Cabinet Decision receive special VAT treatment, and that treatment applies to certain supplies of goods only.
Free zone companies follow the same registration thresholds as mainland businesses. Registration is mandatory above AED 375,000 in taxable supplies and imports, and voluntary from AED 187,500.
Check the Cabinet Decision on the FTA’s legislation portal, then confirm that the activity takes place within the zone’s customs-controlled area.
Services supplied to UAE customers carry 5% VAT from any zone, and zero-rating applies only to qualifying exports.
