Most likely, many have already heard about frizons in the UAE, which offer a number of advantages for foreign investors and entrepreneurs. We discussed this topic, as well as the difference between enterprises registered in free zones and in the territory of the Mainland, in one of our previous articles. However, few people know about Designated Zones (authorized zone), which are also part of the FEZ in the Arab state and have a special tax status.
The introduction of value added tax (VAT) in the UAE in 2018 served as an impetus for the adaptation of the business community to the new economic conditions. Authorized zones were established to provide support to enterprises trading and investing in the country. Due to the special conditions, firms are able to optimize the accounting burden, reduce costs, which makes them more competitive in the international arena.
Consider the concept, features of the concept, related aspects of taxation. Let’s analyze the most promising offers, their advantages and specifics. Let’s analyze the connection with the general concept of FEZ, the impact on the work of residents, factors that play an important role in choosing a suitable location for an enterprise, the registration process.
The Concept of Designated Zones
Definition and purpose of creation
Designated Zones are special territories within the FEZ that have a special taxation system, are created to stimulate economic growth, attract financing from abroad. After the start of the value added tax, about 5 years ago, the UAE government established these territories to support trade and investment enterprises.
The purpose of the creation is to provide additional incentives, benefits for residents to pay taxes, and reduce costs. Firms receive benefits for certain operations. For example, transactions between residents of the same zone or products temporarily stored on its territory. This puts the business in a more advantageous position in front of international representatives, attracts investors from other countries, and creates new jobs.
Role in the economy of the Emirates
Such locations play an important role in the economy. They open up new business prospects, namely:
- flexibility, freedom in doing business;
- no restrictions on the repatriation of capital;
- the possibility of hiring foreign labor;
- conclusion of contracts with local, foreign partners;
- development of such sectors as logistics, technology, production, media, etc.
These factors are important elements of the strategy of diversification of the UAE economy.
Difference between Designated Zones and other UAE Friezes
FEZ and UZ in the UAE have a number of similar characteristics:
- exemption from corporate and income tax;
- the possibility of full ownership of the enterprise by foreign founders;
- full repatriation of capital/profit;
- no customs duties on import/export.
These advantages make the FEZ attractive in the investment and business direction.
The existing differences make the authorized friezes unique, reflected in their status and working conditions.
- Tax status: Special VAT payment conditions apply in the authorized zones (UZ).Unlike conventional FEZs, where the tax is applied to all transactions, in authorized ones some operations are carried out under a preferential scheme. Such cases include transactions between residents, or products left for temporary storage within the same location.
- Regulation and control: The strict attitude of the Emirati government to these processes guarantees compliance with VAT requirements, excludes abuse of benefits. Residents may face a lot of regulatory inspections, audits.
- Restrictions on activities. Working conditions in some areas are specific. This is due to the peculiarities of the regime or the strategic priorities of the development of the UAE economy. Businesses should carefully study the possibilities and limitations associated with registration in a particular territory before making a final decision on residency.
- Geography: Compared to the usual ones, the authorized zones are more advantageously located, for example, near key transport hubs, ports, airports. This facilitates access to international markets and reduces logistics costs.
- Infrastructure and support: Additional advantages in the form of advanced infrastructure, special facilities, and support from local authorities are not uncommon. Among the advantages are the availability of high–speed Internet, modern office and industrial premises, and government support programs.
Despite the obvious similarities, UZS have many differences from the usual FEZs. They make them unique, attractive for development and investment. It is worth studying the proposals, taking into account the peculiarities of each district separately.
Tax aspects of work
Taxation of services
Within the framework of the UZ, the standard VAT rate for services is 5%. When exporting services, the tax is 0%, which reduces the tax burden of enterprises providing services to foreign partners.
Special VAT rules for goods
Here the rules may have significant differences from the usual frison:
- Transactions between residents are not taxed.
- There is no tax on foreign goods not consumed in the territory of free enterprise. Re-export of goods in the initial or modified form, within the framework of basic production, without sale/consumption in the specified territory, has the status “out of scope”. So the rate is not equal to 0%, the products simply do not fall under VAT.
- The tax on goods sold within the boundaries of the zone (consumer purpose) or sold to the territory of the Mainland is 5%. As well as for products manufactured or stored in warehouses in the Designated Zone, sold or used in the Mainland (for example, as the main raw material).
Overview of the main zones
Consider those locations that attract international investors due to their advantages, strategic location. Here is a brief overview of some of them:
- Jebel Ali Free Zone (JAFZA): One of the largest and oldest free zones located in Dubai. JAFZA attracts companies engaged in logistics, trade, production, due to its convenient location near the port of Jebel Ali and Al Maktoum International Airport.
- Dubai Airport Free Zone (DAFZA): DAFZA is located close to Dubai International Airport. Due to this, it is optimally suited for those engaged in aviation, electronics, IT, telecommunications, pharmaceuticals.
- Umm Al Quwain Free Trade Zone (UAQFTZ): UAQFTZ is a new area located in the emirate of Umm al Quwain. It offers affordable conditions for small and medium-sized businesses, as well as the possibility of quick registration. UAQFTZ is optimal for trading, consulting, and services.
- Khalifa Industrial Zone Abu Dhabi (KIZAD) is located near the port of Khalifa, Abu Dhabi Airport, which is suitable for manufacturing, metallurgical, engineering firms.
Aspects of choosing Designated Zones
Each region offers its own terms of cooperation, diverse benefits and concessions. In many ways, the choice depends on the nature of the activity, infrastructure, market access, and taxation features. Let’s consider the aspects that should be taken into account when making a decision.
- Type of activity and industrial specialization.
- Market access, strategic location. Determine what your main sales markets are, what kind of transport is necessary for the delivery of goods and services.
- Infrastructure and resources. Evaluate the requirements regarding access to electricity, water, transport, communications.
- Legal and tax requirements. Make sure that the selected UZ corresponds to these indicators. Some provide special benefits that are not available to other residents. Study all work proposals, registration requirements.
- Cost estimation. Compare the costs of registration, office rental, storage facilities, and other costs.
- Maintenance and support. It is advisable to contact the relevant agencies and for legal advice, which are available within the selected location.
The choice of ultrasound requires a comprehensive analysis, evaluation of a number of factors. Pay due attention to the study of specialization, the conditions of each of them in order to lay a strong foundation for prosperity in the Emirates.
In the economic infrastructure of the Arab Emirates, Designated Zones play a leading role. Offering benefits and exceptional conditions of cooperation, these areas attract the interest of large foreign investors. Residents get access to a wide range of opportunities, and the government focuses on further development and strengthening of the concept.