Key takeaways
- You charge 5% VAT to a UAE free zone company in most cases, because a free zone is treated as outside the UAE for VAT only if it is a listed Designated Zone, and even then the outside-scope treatment is aimed at goods, not services.
- A Designated Zone for UAE VAT is a specific fenced area named in Cabinet Decision No. 59 of 2017 and its amendments, with security and customs controls, so holding a free zone licence does not by itself make a company a Designated Zone business.
- Services you supply to a customer in a UAE Designated Zone are treated as supplied in the UAE and taxed at the standard rate, with zero-rating possible only for qualifying services exported outside the GCC Implementing States.
- Goods you sell from the UAE mainland into a Designated Zone are a local supply, not an export, so VAT applies; goods moving the other way are treated as an import, with import VAT paid by the importer.
- VAT registration with the FTA is mandatory above AED 375,000 of taxable supplies and voluntary from AED 187,500 (as of 9 November 2026), and failing to register on time carries an AED 10,000 penalty.
- The safe sequence is to confirm the customer's zone against the FTA's current Designated Zone list, decide whether you are supplying goods or services, then apply the matching rule.
Do you charge VAT to a free zone company in the UAE?
Yes, in most cases you charge 5% VAT, because a free zone company is treated like any other UAE business for VAT unless it sits in a Designated Zone and the supply is a qualifying one. That position follows from Article 51 of the VAT Executive Regulation (Cabinet Decision No. 52 of 2017), which treats a zone as outside the UAE only when it meets the Designated Zone tests.
Say a mainland design agency bills a free zone customer AED 80,000 for advisory work (a hypothetical): if the service is treated as supplied in the UAE, 5% VAT of AED 4,000 is added and the invoice totals AED 84,000.
What is the difference between a free zone and a designated zone for VAT?
Only a Designated Zone changes VAT treatment; a free zone licence on its own does not. The FTA's Designated Zones VAT Guide says a Designated Zone is treated as outside the UAE only if it meets four conditions:
- It is a specific fenced geographic area.
- It has security measures and Customs controls to monitor the entry and exit of people and the movement of goods.
- It has internal procedures for keeping, storing and processing goods.
- Its operator complies with the procedures set by the FTA.
If a zone changes how it operates or stops meeting those conditions, Article 51(2) treats it as inside the UAE. The zones themselves are listed in Cabinet Decision No. 59 of 2017 and its amendments: the original list covered zones across seven emirates, including Hamriyah Free Zone and Sharjah Airport International Free Zone in Sharjah, and an FTA news item in October 2021 referred to 27 zones. Because the list has changed, check the FTA's current version rather than a free zone brochure. A business inside a Designated Zone is still treated as established onshore for VAT, so it follows the normal registration, reporting and accounting rules.
How does VAT apply to goods you sell to or from a designated zone?
The VAT treatment of goods depends on the direction of the movement, and only some movements fall outside VAT.
| Movement of goods | VAT treatment | Basis |
|---|---|---|
| Mainland UAE to a Designated Zone | Local supply, so VAT applies; not treated as an export | Article 30(3), Executive Regulation; FTA guide section 3.4.2 |
| Designated Zone to mainland UAE | Treated as an import; the importer pays import VAT | FTA guide section 3.5.1 |
| Between two Designated Zones | Outside the scope of VAT if conditions are met, including customs suspension and no release into circulation | Article 51(4); FTA guide section 3.4.3 |
| Supplied within a Designated Zone | Outside UAE VAT by default, but taxable where the goods are consumed | Article 51(5); amended by Cabinet Decision No. 88 of 2021 |
Accurate as of 9 November 2026.
Cabinet Decision No. 88 of 2021, effective 30 October 2021, widened the outside-scope treatment: goods supplied in a Designated Zone can fall outside VAT where they are consumed outside the zone, with evidence of delivery outside the UAE or of VAT paid on import from the zone.
How does VAT apply to services you sell to a free zone company?
Services are generally taxed at the standard rate even when the customer is in a Designated Zone, because Article 51(6) treats the place of supply of services as inside the UAE where the normal rules would place it in a Designated Zone. The FTA guide adds that zero-rating may apply to services exported outside the GCC Implementing States, which is a separate test from where the customer's licence was issued.
Whether your customer can recover the VAT you charge depends on its own registration, because the guide states that input VAT recovery requires VAT registration with the FTA. A customer asking you to leave VAT off because it is "in a free zone" is not enough; the rule has to come from the place of supply of the service.
Do you need to be VAT-registered, and what are the penalties for getting it wrong?
You need to be VAT-registered with the FTA to charge VAT: registration is mandatory above AED 375,000 and voluntary from AED 187,500, and the penalties for missing the rules are set by Cabinet Decision No. 40 of 2017 as amended.
| Item | Figure | Source |
|---|---|---|
| Mandatory registration threshold | AED 375,000 | FTA, Registration for VAT |
| Voluntary registration threshold | AED 187,500 | FTA, Registration for VAT |
| Failure to register within the legal timeframe | AED 10,000 | Cabinet Decision No. 40 of 2017, Table 1, Item 3 |
| Late filing of a VAT return | AED 1,000 first violation; AED 2,000 for a repeat within 24 months | Cabinet Decision No. 40 of 2017, Table 1, Item 8 |
| Late payment of tax due | 14% per annum, applied monthly on the unsettled amount | Cabinet Decision No. 40 of 2017, Table 1, Item 9 |
Accurate as of 9 November 2026. Cabinet Decision No. 129 of 2025 amended parts of the penalties decision with effect from 14 April 2026; the amounts above come from the Ministry of Finance's consolidated copy, which is marked as an unofficial translation.
The FTA's registration page also sets a forward-looking test: register if you expect taxable supplies and imports to exceed the mandatory threshold in the next 30 days. If you'd rather not track these dates by hand, the free UAE compliance calendar lists them for your company.
How do you decide whether to charge VAT to a free zone customer?
Work through five checks in order, because each one narrows the answer for the next.
- Collect the customer's trade licence and registered address, and note the name of the zone.
- Check that zone against the FTA's list of Designated Zones under Cabinet Decision No. 59 of 2017 and its amendments, on tax.gov.ae.
- Decide whether you are supplying goods, services, or both on the same invoice.
- For services, apply the place of supply rules; if the place of supply is in the UAE, charge 5% unless zero-rating for a qualifying export applies.
- For goods, match the movement to the table above and keep delivery evidence, including proof of import VAT where Cabinet Decision No. 88 of 2021 is relied on.
5%: standard rate of UAE VAT. Source: FTA, VAT page (tax.gov.ae), checked 09 November 2026.
What most guides don't tell you
A few points sit between the rules and what happens at a customer's desk:
- Free zone status under corporate tax is a different test from VAT. FTA Public Clarification TAXP010, issued on 2 October 2026, sets out separate tests for corporate tax, VAT and excise, so a zone's status under one tax does not carry over to another. A customer telling you it is a "qualifying free zone person" says nothing about your VAT treatment.
- A zone can lose its treatment. Under Article 51(2), a zone that stops meeting the fencing, customs-control or procedure conditions is treated as inside the UAE, so a list you checked two years ago may not be a safe basis for today's invoice.
- A sale from the mainland into a zone is not an export. The FTA guide says movements from the mainland to a Designated Zone are local supplies, so shipping documents showing a free zone delivery address do not make the sale zero-rated.
- The risk of a wrong call sits with the supplier. You account for the VAT on your own return, so if you leave VAT off an invoice and the treatment turns out to be wrong, the shortfall is yours; an adviser can tell you how to correct invoices already issued.
Which VAT deadlines apply to your company?
Mixed customers in one sales ledger make VAT filing dates easy to lose track of. The UAE compliance calendar is a free calendar of your company's UAE tax and compliance deadlines, personalised from a few questions, as a PDF and calendar file.
Frequently asked questions
What is a designated zone for VAT?
A Designated Zone is a fenced area named in a Cabinet Decision that the FTA treats as outside the UAE for VAT on certain goods transactions, provided it has security and customs controls and internal procedures for keeping, storing and processing goods. Services supplied in a Designated Zone are still treated as supplied in the UAE.
Is VAT charged on services to foreign clients?
It depends on where the service is treated as supplied, and the FTA's Designated Zones guide notes that zero-rating can apply to qualifying services exported outside the GCC Implementing States. Check the place of supply rules for the specific service before you invoice without VAT.
Can I recover VAT on business expenses?
You generally need to be VAT-registered with the FTA to recover input VAT, and businesses in Designated Zones follow the same registration and accounting rules as other UAE businesses. Which costs qualify depends on the FTA's rules for each type of expense.
How does the reverse charge mechanism work in the UAE?
Under a reverse charge, the buyer rather than the supplier accounts for the VAT, so the buyer reports it on its own return. Which purchases qualify depends on the FTA's rules, so confirm the specific supply before applying it to a free zone transaction.
About Qawi · Qawi is a corporate services firm licensed in the Sharjah Media City (SHAMS) free zone, handling company formation, visas and PRO, bookkeeping, VAT and corporate tax for UAE businesses. Guides are researched from FTA, Ministry of Finance and free zone sources. Qawi on LinkedIn
Sources
- Designated Zones VAT Guide (VATGDZ1, Issue 1, July 2018), FTA, hosted on u.ae
- Amendment on tax treatment for supply of goods in Designated Zones and connected shipping (Cabinet Decision No. 88 of 2021), FTA
- Registration for VAT, FTA
- Value Added Tax, FTA
- List of Designated Zones under Cabinet Decision No. 59 of 2017, FTA (Arabic)
- Cabinet Decision No. 40 of 2017 and its amendments (consolidated, 14 November 2025), Ministry of Finance
- Public Clarification TAXP010, Designated Zones for CT, VAT and Excise (October 2026), FTA
Last checked: 09 November 2026
This is general information, not tax or legal advice for your specific situation.