Since the introduction of Value Added Tax (VAT) in the UAE in 2018, businesses across both the Mainland and Free Zones have been subject to VAT regulations. However, the rules aren’t the same for all, particularly when it comes to Designated Zones.
If you’re unsure how VAT applies to your setup, this blog will help clarify the key differences, so you stay compliant and confident in your operations.
Mainland Businesses and VAT
Mainland companies follow the standard VAT rules:
- VAT at 5% is applied to all taxable goods and services sold within the UAE.
- Required to register for VAT if taxable supplies exceed AED 375,000 annually.
- Must issue tax invoices, file VAT returns, and remit payments as per the FTA guidelines.
- Sales to or purchases from Free Zones are treated like any domestic transaction.
Key Takeaway: Mainland = standard 5% VAT on all applicable supplies.
Free Zone Businesses and VAT
Free Zones are within UAE territory and not exempt from VAT, but there is a distinction:
🔹 Regular Free Zones
- Operate under the normal VAT rules.
- Must register and charge VAT on taxable supplies.
- No special treatment unless listed as a Designated Zone.
🔹Designated Zones
These are Free Zones officially listed by the UAE Cabinet as having special VAT treatment.
- Goods transferred within or between Designated Zones may be VAT-free, but only under strict conditions:
- The goods must not be released into the UAE mainland.
- The movement must be documented and tracked.
- No consumption should take place within the UAE.
Services are not eligible for VAT exemption — even in Designated Zones.
Mainland vs. Free Zone VAT – A Quick Comparison
| Criteria | Mainland | Free Zone | Designated Zone |
| VAT Registration | Mandatory | Mandatory | Mandatory |
| VAT on Local Sales | Yes (5%) | Yes (5%) | Yes (5%) |
| VAT on Services | Yes | Yes | Yes |
| VAT on Goods (Zone-to-Zone) | N/A | Standard | May be 0% if conditions are met |
| Exemption Possible? | No | No | Yes (goods only) |
Common Mistakes to Avoid
- Assuming VAT exemption just because your business is in a Free Zone.
- Treating Designated Zones as “outside UAE”, they’re still under FTA rules.
- Applying 0% VAT on services between designated zones is not allowed.
Conclusion
Understanding how VAT applies in the UAE depends not just on where you’re registered, but also on how and where your transactions occur. Designated Zones offer certain VAT benefits, but only for goods and only under specific conditions.
Whether you’re on the mainland or in a Free Zone, VAT compliance isn’t optional, and penalties can be steep for errors or late filings.
At Vista Accounting & Tax Consultancy, we help clients navigate the complex VAT landscape with confidence. From registration to invoicing and reporting, our experts ensure you stay compliant while maximizing your efficiency.
Contact us today to clarify your VAT obligations or review your VAT setup.