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VAT Free Zone Companies
In the UAE’s sophisticated tax landscape of 2026, the term “Free Zone” is often synonymous with tax efficiency. However, while these zones offer incredible advantages, they are not entirely “tax-free” when it comes to Value Added Tax (VAT). Understanding the nuances of how the Federal Tax Authority (FTA) views your free zone entity is the difference between a seamless operation and unexpected penalties.
Whether you are trading physical goods from JAFZA or providing consultancy from Shams, here is the essential guide to staying compliant.
Is VAT Applicable for Free Zone Companies in UAE?
One of the most frequent questions business owners ask is: is vat applicable for free zone companies in UAE? The answer depends largely on whether your free zone is classified as a “Designated Zone” or a “Non-Designated Zone.”
Designated Zones
These are special fenced-off areas (like DAFZA, JAFZA, or SAIF Zone) that are considered “outside the UAE” for VAT purposes regarding the supply of goods.
Non-Designated Zones
Many modern free zones (like Meydan or IFZA) are treated as “onshore” for VAT. In these zones, standard 5% VAT rules apply to almost all transactions, just like a mainland company.
Crucial Distinction
Even in a Designated Zone, services (like accounting, legal, or marketing) are almost always subject to the standard 5% VAT if they are consumed within the UAE. The VAT-free status primarily applies to the movement and trading of physical goods.
Do Free Zone Companies Need to Register for VAT?
The short answer is, yes, if you meet the turnover requirements. Do free zone companies need to register for vat even if they only trade internationally? Absolutely. The registration triggers are based on “Taxable Supplies,” which include zero-rated exports.
Free Zone Company VAT Registration Thresholds
Mandatory Registration
You must register if your taxable turnover (including exports) exceeds AED 375,000 over the previous 12 months.
Voluntary Registration
You can choose to register if your turnover or taxable expenses exceed AED 187,500.
For many startups, free zone company vat registration is done voluntarily. This allows the business to claim back the 5% VAT paid on setup costs, office furniture, and professional fees—turning a tax cost into a recoverable credit.
VAT for Free Zone Companies in UAE: Goods vs. Services
The complexity of vat for free zone companies in UAE lies in what you sell.
Trading Goods
If you are in a Designated Zone:
- To another Designated Zone: Generally, 0% VAT (out of scope).
- To the Mainland: 5% VAT applies (usually handled via the Reverse Charge Mechanism by the importer).
- To Outside the UAE: 0% VAT (Export).
Providing Services
If you are providing services from any free zone:
- To a UAE client: 5% VAT applies.
- To an international client: 0% VAT (provided you meet the strict “export of services” criteria).
VAT Registration for Free Zone Companies in UAE
The process for vat registration for free zone companies in uae is handled through the FTA’s Emara Tax portal. In 2026, this process is highly automated but requires specific documentation:
- Trade License: Your valid free zone business license.
- Passport & Emirates ID: For the manager/owner.
- Turnover Declaration: A signed statement on company letterhead proving your sales or expenses.
- Customs Details: If you are in a Designated Zone, your customs code is vital for linking your imports to your TRN.
Importance of VAT Compliance for Free Zone Businesses
Maintaining VAT compliance protects free zone companies from penalties and operational disruptions. Accurate VAT accounting, timely filing, and proper documentation support transparency and build trust with authorities and business partners. Outsourcing VAT services allows companies to focus on growth while ensuring regulatory compliance.
Frequently Asked Questions
Yes. Exports are "Zero-Rated," which is a taxable rate of 0%. Because they are taxable supplies, they count toward the AED 375,000 threshold. If you cross that limit, you must register, even if you never actually "collect" 5% from a customer.
As of 2026, the penalty for failing to register for VAT when required remains AED 10,000. It is much safer to monitor your 12-month rolling turnover monthly.
Yes. Free zone companies can form a Tax Group with other UAE entities (including mainland ones) if they are under common control. This allows for VAT-free transactions between the group members and a single combined VAT return.
Not necessarily. VAT and Corporate Tax have different sets of rules. To get 0% Corporate Tax, you must be a "Qualifying Free Zone Person," which involves meeting specific "substance" requirements that are separate from your VAT status.