Designated Zones in the UAE: Bill of Entry, VAT Liability & 0% Corporate Tax — What Businesses Must Know
The UAE’s tax system distinguishes Designated Zones (DZs) as special areas treated as “outside the UAE” for VAT purposes, while still being within the UAE for Corporate Tax. Understanding the correct filing of Bill of Entry, VAT treatment, and Corporate Tax (CT) impact for transactions involving these zones is crucial for compliance and to preserve 0% tax benefits.
Understanding Designated Zones
Designated Zones are specific free zones notified under Cabinet Decision No. (59) of 2017 on Designated Zones for VAT. These zones are fenced, security-controlled, and subject to strict customs supervision.
Examples include JAFZA, Hamriyah Free Zone, Dubai Airport Free Zone, and Umm Al Quwain Free Trade Zone.
For VAT purposes, goods transferred between two designated zones can be treated as outside the UAE VAT scope, provided the movement meets FTA conditions. However, for Corporate Tax, all Free Zone Persons (including those in designated zones) are considered resident taxpayers subject to Federal Decree-Law No. 47 of 2022 (UAE Corporate Tax Law), with possible 0% CT on qualifying income.
Bill of Entry – The Key to Tax Treatment
The Bill of Entry plays a decisive role in determining both VAT and Corporate Tax consequences for designated zone entities.
1.Imports into Designated Zone
When goods are imported from abroad into a designated zone:
- The Freezone Bill of Entry is filed in the name of the designated zone company.
- The goods remain under customs control; no VAT is due at this stage.
- VAT liability arises only when the goods are released into the mainland or consumed within the UAE.
2.Transfers Between Designated Zones
- If the movement is under customs suspension and tracked properly, no VAT applies.
- However, both zones must be FTA-approved Designated Zones, and the movement must comply with customs documentation requirements.
3.Sales from Designated Zone to Mainland
This is the most sensitive scenario:
- If a mainland buyer files the Bill of Entry in its own name, VAT is payable by the mainland company under reverse charge mechanism.
- If the designated zone company files the Bill of Entry in its own name, it becomes the importer of record, triggering VAT liability and possibly Corporate Tax implications.
FTA has clarified that the importer on record is responsible for VAT payment, even if goods are later re-exported. Incorrect filing may expose the DZ company to VAT penalties and loss of 0% CT benefits.
VAT Liability – When Does It Arise?
VAT implications hinge on the place of supply and the importer of record:
- Supply within a Designated Zone – treated as outside VAT scope, unless goods are consumed there.
- Supply to UAE mainland – VAT at 5% applies, with importer responsible.
- Re-export of goods directly from a designated zone to outside UAE – either zero-rated supply or outside scope of VAT, depends on and provided export evidence is maintained.
FTA audits frequently verify whether goods were consumed or moved correctly. Hence, maintaining Bill of Entry, export documentation, and movement records is vital.
Corporate Tax (CT) Consequences for Designated Zone Companies
Under Article 18 of the Corporate Tax Law and Ministerial Decision No. 139 of 2023, Free Zone Persons (including designated zones) can enjoy 0% Corporate Tax on Qualifying Income, provided:
- The company is a Qualifying Free Zone Person (QFZP);
- Adequate substance (staff, premises, and OPEX) is maintained in the free zone;
- The entity does not elect to be taxed at 9%;
- The income arises from Qualifying Activities, such as trading goods with other Free Zone Persons or foreign parties.
However:
- If a Designated Zone company files the Bill of Entry in its own name for mainland deliveries, the transaction may be treated as with a Non-Free Zone Person, disqualifying it from the 0% CT rate.
- Such revenue may be non-qualifying income, and if it exceeds the de-minimis threshold (5% or AED 5 million), the entire income could be subject to 9% CT.
Common Compliance Issues
- Incorrect Bill of Entry name — filing under the DZ company’s name instead of the mainland buyer’s.
- Goods consumed in DZ without VAT accounting — leading to VAT non-compliance.
- Failure to track de-minimis limits — risking loss of 0% corporate tax status.
- Inadequate substance — insufficient headcount or physical presence within the free zone.
Best Practices for Compliance
- Always file Bill of Entry in the name of the mainland buyer when goods are imported to mainland.
- Maintain clear documentation for all transfers, exports, and re-exports.
- Conduct periodic VAT and CT compliance audits to ensure adherence.
- Keep a De-minimis Monthly Tracker to monitor non-qualifying income.
- Retain contracts, shipping documents, and customs records as evidence during audits.
Conclusion
Designated Zones provide immense tax advantages for traders and distributors in the UAE, but improper handling of Bill of Entry or failure to monitor VAT and CT implications can lead to heavy penalties and loss of 0% status.
At Accruon Auditing LLC, we assist designated zone companies in:
- Ensuring correct Bill of Entry documentation,
- Performing VAT reconciliation and compliance reviews, and
- Conducting Corporate Tax compliance audits to safeguard their 0% eligibility.
For professional VAT & Corporate Tax compliance support for Designated Zone entities, contact Accruon Auditing LLC at mail@accruon.me .Your trusted audit & tax partner in the UAE.