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The UAE has introduced targeted amendments to its VAT framework through Federal Decree-Law No. 16 of 2025, effective 1 January 2026, reinforcing the country’s ongoing efforts to strengthen tax compliance, improve clarity across sectors, and align the VAT regime with evolving business practices. These updates build on the framework originally introduced under Federal Decree-Law No. 8 of 2017 on Value Added Tax, which established VAT in the UAE at a standard rate of 5%.
For businesses operating in Designated Zones, the amendments underscore that while these zones continue to offer certain VAT advantages, the rules remain technical and require careful compliance. Importantly, the preferential VAT treatment available in Designated Zones is not automatic and applies only where the specific statutory conditions are satisfied.
VAT Treatment of Goods in Designated Zones
Designated Zones continue to be treated as being outside the UAE for VAT purposes in relation to goods, provided specific conditions are satisfied. This means that the transfer of goods within the same Designated Zone or between different Designated Zones may fall outside the scope of VAT, assuming the goods remain within the designated area and customs procedures are properly followed. However, where goods leave the designated area or the required customs controls are not maintained, the transaction may be treated as a mainland supply and become subject to VAT.
Services Supplied in Designated Zones
One of the most important principles businesses must remember is the difference in VAT treatment between goods and services. While goods can benefit from the special VAT treatment associated with Designated Zones, services supplied within these zones are generally still subject to the standard 5% VAT rate. Businesses should therefore carefully evaluate their transactions to ensure the correct classification and treatment.
Documentation and Evidence Requirements
Proper customs, transport, and logistics documentation remains essential. Companies must be able to demonstrate that goods have physically moved or remained within a Designated Zone and that the required customs controls were maintained. Without sufficient evidence, the tax authority may treat the transaction as taking place within the UAE mainland and subject it to VAT. In practice, the absence of sufficient documentation is one of the most common triggers for VAT reassessments in free zone structures.
Increasing Regulatory Scrutiny
As the UAE continues strengthening its tax governance and compliance environment, authorities are expected to pay greater attention to place-of-supply rules, movement of goods, and supporting documentation. Free zone businesses, especially those involved in trading or logistics, should expect more detailed reviews of how transactions are structured and recorded. Businesses relying heavily on Designated Zone structures should therefore ensure that operational practices fully align with the legal requirements of the VAT regime.
What should businesses do now?
Businesses operating in free zones should take this opportunity to review their supply chains and internal VAT procedures. Confirm whether your free zone is officially recognized as a Designated Zone for VAT purposes, reassess how goods and services are classified in your transactions, and ensure that all documentation supporting VAT treatment is complete and accessible. It may also be advisable to reassess transaction flows, contractual structures, and logistics arrangements to ensure that the intended VAT treatment is properly supported in practice.
Proactive review today can help businesses avoid disputes, penalties, or reassessments in the future as the UAE continues refining and strengthening its VAT framework and enforcement practices.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
