VAT on Free Zone Companies in the UAE: Guidelines, Applicability, Exemptions

VAT in UAE free zones is applied differently depending on whether the company is in a designated or non-designated zone. Goods may be exempt, zero-rated, or taxed, while services generally remain subject to VAT rules.

Key Takeaways

• Designated free zones are treated as outside UAE for certain goods supplies, but services remain taxable.
• Movement of goods to the mainland from free zones triggers VAT, often under reverse charge.
• Imports into designated zones are not treated as UAE imports until moved to mainland.
• Exports of goods or services from designated zones to outside UAE are zero-rated under VAT.
• Non-designated zones follow standard UAE VAT rules, with 5% VAT on goods and services.
• VAT registration is mandatory if annual taxable supplies/imports exceed AED 375,000.

What are Free Zones in the UAE?

VAT Free Zones (also called Designated Zones) are business zones in the UAE that are treated as outside the UAE for VAT purposes, under certain conditions. This means that transactions within and between these zones can be treated differently from mainland UAE VAT rules.

Free zones are economic areas in the UAE established to provide an opportunity for international investors to establish investment and support in their business development, import/export trade, or provide products/services supporting the UAE. 

A company formed within a free zone can take advantage of regulations considered more flexible than on the mainland, and the investment/tax framework is different from mainland companies. Each free zone has its own authority, regulations, operational rules, and business set-up and is unique in each aspect to allow companies to have their own environment.

Key Features

• Special VAT Status: Supplies of goods between companies inside a designated free zone may not attract VAT (subject to rules).
• Supplies to the Mainland: When goods move from a Free Zone to the mainland UAE, VAT is applicable.
• Services: Most services supplied from a free zone are still subject to the standard VAT rules (i.e., taxed at 5%).
• Customs Control: Goods must remain within the designated area and under customs authority oversight to enjoy VAT-free movement.

Types of Free Zones in UAE

The United Arab Emirates is home to more than 45 free zones, each catering to different industries and business needs. Free zones are special economic areas where companies can enjoy 100% foreign ownership, tax incentives, and simplified import/export procedures. However, VAT implications in free zones depend on whether the zone is classified as a Designated Zone by the Federal Tax Authority (FTA).

Designated Free Zones

These zones are specified by the FTA where special VAT rules apply. Transactions between entities within the same designated free zone or between designated zones may be treated as outside the scope of UAE VAT, provided certain conditions are met. Examples include:

• Jebel Ali Free Zone (JAFZA)
• Dubai Airport Free Zone (DAFZA)
• Khalifa Industrial Zone Abu Dhabi (KIZAD)
• Hamriyah Free Zone

Key VAT Impact: Supplies of goods between designated zones may not be subject to VAT, but services are still taxable.

Non-Designated Free Zones

Most free zones fall into this category. Standard VAT rules apply here, and supplies are treated like any other business transactions in the UAE. Examples include:

• Dubai Multi Commodities Centre (DMCC)
• Sharjah Media City (Shams)
• Dubai Internet City (DIC)
• Ajman Free Zone

Key VAT Impact: All supplies of goods and services are subject to 5% VAT, unless specifically zero-rated or exempt.

Industry-Specific Free Zones

Some free zones specialize in certain industries, offering regulatory frameworks, licensing, and infrastructure tailored for those sectors:

• Media & Technology: Dubai Media City, Twofour54 (Abu Dhabi), Dubai Internet City
• Finance: Dubai International Financial Centre (DIFC), Abu Dhabi Global Market (ADGM)
• Healthcare: Dubai Healthcare City (DHCC)
• Logistics & Trade: JAFZA, DAFZA, KIZAD
   

Key VAT Impact: VAT applicability depends on whether the zone is designated. For instance, DIFC is not a designated zone, so all supplies attract VAT.

Free Zones with Dual Operations

Some businesses in free zones also maintain operations on the mainland. In such cases, companies may require both a free zone license and a mainland license, which affects VAT registration and reporting obligations.

VAT Treatment on Free Zones Companies in the UAE

The VAT treatment in UAE Free Zones depends on whether the Free Zone is recognised as a Designated Zone under the Cabinet Decision. Only those specifically listed qualify for special VAT rules, while all others are treated as part of the UAE mainland for VAT purposes.

Goods Transactions in Designated Zones

The VAT implications on goods in Designated Zones depend on whether they are moved within, imported, or supplied to/from the mainland.

Services Transactions in Designated Zones

Unlike goods, services supplied in Designated Zones are generally taxed at the standard VAT rate unless exported outside the UAE.

VAT Rules for Designated Zones vs. Non-Designated Zones

The UAE VAT treatment varies depending on whether a business is operating in a Designated Zone or a Non-Designated Zone. Here’s a quick comparison:

Complete List of Designated Free Zones in the UAE

Designated Free Zones are special areas within the UAE where certain VAT rules differ from those applied on the mainland. These zones are treated as being outside the UAE for VAT purposes when it comes to specific supplies of goods, making them highly significant for import–export businesses.

Register Businesses in the Free Zone in UAE

Registering a company in a free zone is one of the most popular routes for entrepreneurs and investors who want to establish a presence in the UAE without needing a local partner.

Eligibility

Not all business activities are eligible for free zone registration. Eligibility criteria usually depend on the type of business activity and the specific free zone authority

• The applicant must select a Free Zone that matches their industry (e.g., Dubai Internet City for IT firms, JAFZA for logistics).
• Foreign individuals and corporate entities can apply without needing a local sponsor.
• Some Free Zones restrict specific activities (e.g., financial services may require Central Bank or FSRA approval).
• Applicants must have a clear business activity aligned with the Free Zone’s licensing categories (e.g., trading, services, manufacturing).

Steps to Register Businesses in the Free Zone

The registration process typically involves the following steps:

1. Choose the Free Zone and decide the business activity
2. Select the type of business structure (FZE, FZC/FZCO, or Branch)
3. Reserve the trade name with the Free Zone authority
4. Submit the initial application with required documents
5. Pay the initial registration fees
6. Wait for review and pre-approval from the authority
7. Lease an office space or flexi desk in the Free Zone
8. Finalize documentation and sign legal agreements
9. Pay license fees and receive the business license
10. Apply for visas under the Free Zone quota
11. Open a corporate bank account in the UAE

Documents Required

While documents may differ by Free Zone, typical requirements include:

For Individuals

• Passport copy (valid for at least 6 months)
• Passport-sized photographs
• Resume or CV (in some cases)
• Entry visa / UAE residence visa (if applicable)

For Corporate Shareholders

• Certificate of Incorporation
• Memorandum and Articles of Association
• Board resolution for company setup in the UAE
• Passport copies of directors/shareholders
• Power of Attorney (if a representative applies on behalf)

Other Supporting Documents

• Business plan (for certain activities)
• Proof of address (utility bills, tenancy contract)
• No-Objection Certificate (NOC) if shareholder is UAE resident under another sponsor

VAT Registration for Free Zone Companies

Free zone companies in the UAE are required to register for VAT if their taxable supplies and imports exceed the mandatory threshold of AED 375,000. Below are the key steps:

Steps for VAT Registration:

1. Create an FTA account: Sign up on the Federal Tax Authority (FTA) portal.
2. Prepare documents: Trade license, company incorporation certificate, passport & Emirates ID of owners, and financial records.
3. Fill VAT registration form: Provide company details, turnover, and business activities on the FTA portal.
4. Upload documents: Submit all required documents digitally for verification.
5. Await FTA approval: Once reviewed, the FTA issues a TRN (Tax Registration Number).
6. Start VAT compliance: Charge VAT on taxable supplies, file returns, and maintain proper records.

Key Benefits of Free Zones in the UAE

Some of the key benefits of operating in a free zone are:

• 100% foreign ownership: No local shareholder or sponsor is required, letting overseas founders retain full control over equity, strategy, IP, and exits.
• 0% corporate and personal income tax (zone-specific periods):  Most zones offer multi-year tax holidays (often renewable). This materially improves after-tax cash flow during scale-up years. 
• Full repatriation of capital and profits: No restrictions on sending dividends, management fees, or sale proceeds back to the parent or shareholders.
• Customs duty advantages: Imports into many free zones can be duty-free while goods remain in the zone; duties typically apply only when goods enter the UAE mainland. Ideal for regional distribution hubs and re-exports.
• Streamlined company setup: One-stop portals handle licensing, establishment cards, e-signatures, and facility leasing. Standardized templates and digital KYC make incorporation fast (often days, not weeks).
• Sector-specific ecosystems: Clusters (e.g., logistics, media, tech, commodities trading, finance) provide targeted infrastructure, buyer/supplier networks, and specialist regulators—boosting speed to market and credibility.
• Visas and talent mobility: Company quotas for employment visas, investor/partner visas, and easy dependents sponsorship help you recruit and relocate teams quickly.
• Flexible facility options: From flexi-desks and co-working to warehouses, light-industrial units, and build-to-suit land so your overheads scale with demand.
• Banking access & credibility: Well-known zones maintain banking relationships and compliance standards that can ease account opening and correspondent banking for cross-border trade.
• Modern dispute resolution & contracts: Many zones offer robust commercial frameworks; some (e.g., common-law financial free zones) provide independent courts/arbitration, English-language contracts, and investor-friendly rules.
• IP protection & licensing clarity: Clear rules for trademarks, software, content creation, media production, and regulated activities reduce compliance risk for knowledge-based businesses.
• Operational speed & admin simplicity: E-channels for renewals, amendments, NOCs, and permits minimize downtime; fewer touchpoints than mainland licensing for many activities.
• Strategic location & logistics: Proximity to seaports and airports, bonded corridors, and 24/7 customs facilities support just-in-time supply chains and same-day re-exports across the MENA, Africa, and South Asia regions.
• Dual-licensing pathways (zone-dependent): Some emirates allow eligible free-zone firms to obtain additional mainland permits to sell onshore without a separate mainland entity expanding addressable market.
• Cost predictability: Transparent packages for license, visas, and facilities (often bundled) simplify budgeting and reduce unexpected government charges.

Conclusion

VAT rules for free zone companies in the UAE can feel complex, especially with distinctions between designated zones and non-designated zones, group VAT registration, and compliance requirements. However, understanding these guidelines is essential to avoid penalties and ensure smooth business operations. Whether it’s knowing the advantages and disadvantages of VAT grouping, the list of designated free zones, or the registration steps, businesses must stay aligned with Federal Tax Authority (FTA) regulations.