Compared with goods purchased in designated areas in the UAE, the value-added tax treatment of services received in designated areas is different. If it is a commodity, purchases within the designated area and outside the United States are deemed to be outside the scope of VAT. Providing services to designated areas will not bring similar benefits.
In this article, we will understand the value-added tax treatment of services received in a designated area in the following situations:
1. Services received from designated areas
2. Services provided by the mainland
3. Services obtained from outside the UAE
To learn more about designated areas, please read Value-added tax in designated areas in the UAE and VAT in free zones.
Services received from designated areas
The tax rate for services provided between designated areas in the UAE is 5%. This is because the location of supply of services provided in the designated area is considered to be in the state.
For example, Tropical Enterprises, located in the Jebel Ali Free Zone, obtained IT services from Matrix Technologies located in the Free Zone of Dubai Airport.
Service designated area
In the picture above, Jebel Ali Free Zone and Dubai Airport Free Zone are designated areas. The services provided by Matrix Technologies to tropical companies will attract 5% VAT.
Services received from mainland UAE
Services provided from the mainland (inside the country) to designated areas are taxable, and 5% value added tax shall be deducted from the service tax.
For example, Tropical Enterprises, located in the Jebel Ali Free Zone, obtained IT services from MAX Technologies, located in the mainland of Dubai.
Serve the mainland
In the above picture, IT services are received from Dubai (mainland) in Jebel Ali Free Zone (designated area). IT services provided from MAX Technologies to tropical companies are taxable, and such IT services are subject to a 5% value-added tax.
Services obtained from outside the UAE
Services received in designated areas outside the UAE State shall be taxed at the opposite fee. Recipients of such services need to calculate value-added tax on the basis of reverse charging and pay the value-added tax accordingly when submitting the value-added tax return.
For example, tropical companies located in the Jebel Ali Free Zone have received the services of Indian high-tech companies.
In the above picture, services are provided from India to the Jebel Ali Free Zone (designated area). Services provided from high-tech limited companies to tropical enterprises shall be taxed at a rate of 5%. Tropical companies need to account for value-added tax and pay value-added tax for such services in a reverse charge.
Companies located in designated areas must remember that whether they receive services from the designated area or from within the state (inland), they are subject to tax. In addition, they need to be aware that services received from outside the state are subject to value-added tax. This means that recipients of such services are required to pay VAT and pay VAT liabilities when submitting a VAT return to the UAE.