Do I Charge VAT to a Free Zone Company in the UAE?

Quick answers

Do I charge VAT to a free zone company in the UAE?

If you are supplying services, yes — you charge 5% VAT to a free zone client exactly as you would to a mainland one. The special VAT treatment people associate with free zones applies to goods, not services, and only to a specific list of zones.

Are services standard-rated in every free zone?

Yes. The designation of a zone has no effect on services. A service supplied to a business in a designated zone, a non-designated zone or the mainland is standard-rated at 5% in each case, provided it is not zero-rated or exempt on some other ground.

Is a designated zone the same as a free zone?

No. Only zones that appear on the official list — established by Cabinet Decision No. 59 of 2017 and its amendments — qualify for designated zone treatment. Many free zones are not on it, including DMCC, DIFC and ADGM.

Can I zero-rate a free zone client as an overseas client?

No. A free zone company has its place of residence in the UAE. It is not outside the state, so the export-of-services conditions do not apply to it.

Is this tax advice?

No. This is general information about VAT on supplies to free zone companies in the UAE. Confirm your obligations with the Federal Tax Authority or a qualified tax advisor.

Where the confusion comes from

Two separate ideas get merged into one.

The first is that some free zones are treated as outside the UAE for VAT purposes. That is true, but only for certain transactions in goods, and only in zones that appear on an official list.

The second is that free zone companies are somehow outside the VAT system. That is not true at all. A free zone company is a UAE business. It registers for VAT on the same thresholds as everyone else, it holds a TRN, and it receives ordinary tax invoices.

Put those two together carelessly and you arrive at "free zone means no VAT", which is wrong in most situations a service business will meet.

Services are standard-rated in every free zone

This is the part worth remembering above all others.

The designation of a zone has no effect on services. A service supplied to a business in a designated zone, a non-designated zone or the mainland is standard-rated at 5% in each case, provided it is not zero-rated or exempt on some other ground.

So if you are a consultant, designer, developer, agency or any other service business invoicing a free zone client, the answer is simply 5%, and nothing about the client's zone changes it.

Designated zone is not the same as free zone

Only zones that appear on the official list — established by Cabinet Decision No. 59 of 2017 and its amendments — qualify for designated zone treatment. Many free zones are not on it.

Some of the best-known names in the country are not designated zones, including DMCC, DIFC and ADGM. A zone being large, prestigious or well known says nothing about its VAT status.

The list has been amended over time. Check the current version published by the Federal Tax Authority rather than a figure quoted in an article, including this one.

And "designated" does not mean "VAT-free". It means specific goods transactions may fall outside the scope of VAT when conditions are met.

What the difference actually covers

For completeness, the goods side. In a designated zone, goods transferred between qualifying businesses within and between such zones can be treated as taking place outside the UAE's VAT territory, subject to customs conditions being met. Goods imported from abroad directly into a designated zone are not treated as an import into the UAE at the point of entry.

When goods leave a designated zone for the mainland, that is an import, and VAT applies.

In a non-designated zone, none of this applies. Goods and services alike are treated as they would be on the mainland.

Water and electricity supplied within a designated zone are treated as services, and are taxed accordingly.

A free zone client is not an overseas client

These two questions arrive together and have different answers.

A free zone company has its place of residence in the UAE. It is not outside the state, so the export-of-services conditions do not apply to it, and you cannot zero-rate a service on the grounds that the client sits in a free zone.

Charging 0% to a free zone client because it "isn't really the UAE" is the specific error that leads to a reassessment, because the shortfall is yours to pay whether or not you collected it.

What goes on the invoice

Nothing unusual. It is an ordinary tax invoice: your TRN, the client's TRN, sequential numbering, the 5% VAT line and AED totals, with the full or simplified format decided by the same rules as any other supply.

Your free zone client will want their TRN on the document so they can reclaim the input VAT, which is exactly the situation the full tax invoice format exists for.

When to check with an accountant

If your work involves physical goods moving in or out of a designated zone, or a client that operates from both a free zone and the mainland under two licences, the answer stops being simple and the documentation requirements grow. That is the point to ask rather than infer.

Frequently asked questions