Understanding Excise Tax with Designated Zones | UAE

What is a DZ?

According to Article 15(2) of the The Executive Regulation of the Federal Decree-Law No. 7 of 2017 on Excise Tax, a Designated Zone “is a fenced area that: 

• has security measures in place to restrict entry and exit of individuals and movement of Excise Goods to and from the fenced free zone according to the controls specified by the Authority 

• is controlled and supervised by a customs department, and 

• a Warehouse Keeper has been appointed for the fenced free zone” 

In simpler terms, a DZ is an enclosed area (eg: Warehouse) to which movement of goods and persons are thoroughly monitored by the Authority or an appointed person (called Warehouse Keeper).  

Why is a DZ so important? 

The Decree-Law  only highlights the functionality of DZ’s in Clause 8 of the aforementioned article where: 

“Excise Goods that are imported into, received, produced, stored, preserved, processed or otherwise held in a Designated Zone will not be subject to Tax until those goods are released from the Designated Zone or are deemed to have been released for consumption” 

Again to explain the matter in simpler terms, Excisable activities (activities that give rise to an excise tax liability) undertaken within DZ’s would not give rise to an excise tax liability if performed within DZ(s), unless the goods leave the vicinity of the registered DZ in case of which the goods will be considered as Released from Designated Zone, which falls under the scope of Clause 2 of Article 2 of Federal Decree-Law No. 7 of 2017. 

Still not convinced? Lets illustrate the matter with an example: 

• Company A is involved in the production of cigarette packets  in UAE mainland, which are registered at an RSP of AED 8 of. The excise tax rate for cigarettes is 100%.  
• Company A is is considering the need to use the services/ egister a Designated Zone, in comparison to producing the cigarettes within the UAE mainland. The company produces more than it sells in order to minimize/utilize any unmet demands in the market 

The forecasted production and sales for the cigarettes for the next 3 months based on market research are as follows: 

Below table details the excise tax liability in each of the scenarios (A)if the If the company continues to produce the cigarettes in UAE mainland, without rendering the services for a Designated Zone (DZ) or (B) the company starts producing cigarettes within a registered DZ and release goods according to the local sales demand.

The reason for the savings of AED 116,000 opting for Scenarion B is due to the fact that excise tax liability is levied on the quantity produced if the goods are produced within the mainland. However, as per Clause 8 of Article 15 of the The Executive Regulation of the Federal Decree-Law No. 7 of 2017 on Excise Tax, Company A does not have to pay the tax liability unless the goods are released from the DZ (likely based on sales orders). 

Implications of registering a DZ on Business Operations 

Now if the concept of DZ fancies your business operations, do keep in mind the implications that come with registering a Designated Zone for your business: 

• Demand Factors: A designated zone is commercially viable if the goods are assumed to fall under the category of ‘slow-moving stock’ or if the products have seasonal demand. If the entire quantity of all the products that is imported/ produced is sold within the same month, having a DZ does not bring about a cashflow advantage to the organization. 

• Increased Operational Challenges: Registering a Designated Zone also brings increased operational challenges for a business, who are subject to stringent regulations such as maintaining a real-time record of the level of stock within a DZ which requires implementation of a stock and record management system that tracks the movement of goods, ensuring through security measures are in place to restrict the movement of goods and personnel to  and from the DZ which requires the installation of CCTV camera’s, biometric systems etc. which deems additional investment on part of businesses. 

• Increased level of record-keeping: The FTA requires Warehouse Keepers to maintain records of Excise Goods held in the Designated Zone at any time, which is sufficient to prove  
  1. the stock levels of the DZ at any given time 
  2. the value and quantity of Excise Goods entering the DZ 
  3. the value and quantity of Excise Goods leaving the DZ and released for consumption, transferred to another DZ or Export.
  4. the value and quantity of Excise Goods subject to deficiency or shortage and that which was or will be destroyed.
• If the Warehouse Keeper fails to maintain accurate records and the required level of supporting documentation to prove the movement and storage of excise goods within the DZ, the FTA may impose penalties on the Warehouse Keeper, may suspend the DZ registered with the FTA or may increase the level of financial guarantee required to be submitted by the applicant. 
• Financial Guarantee: Furthermore, businesses must also keep in mind that the FTA also secures a financial guarantee figure for each DZ registered by the applicant, in line with the value of excise goods that is expected to be held within the DZ. The minimum guarantee amount is AED 175,000, which again is subject to the risk matrix set by the FTA and may also increase at the time of renewal (12 months post-registration) 

• So after considering all the benefits and challenges a DZ can bring to your organization, you would like to commence the activity of registering your own Designated Zone 

How to register a Designated Zone? 

• Companies must first submit a Warehouse Keeper application in their EMAARATAX Portal. Once the Warehouse Keeper Application is approved by the FTA, the applicant may proceed to submit a DZ Registration application.  
• Applicants must ensure that they have thorough control measures in place to scrutinize the movement of people and goods to and from the Designated Zone, such as having CCTV cameras, biometric scanners, and security personnel in place. At the time of application, the applicant must submit proof of such implemented measures.  
• Moreover, applicants must be able to prove that it maintains a stock and record management system which tracks goods moving in and out of the designated zone as well as transfers between designated zones.  
• Applicants must also submit the type and quantity of goods that will be stored in the DZ, and the anticipated level of closing stock for each item for the next 12 months.  
• Other documents required to be submitted to the FTA would include declaration letter on tax evasion, number of employees employed by the warehouse keeper, total value of assets held by the warehouse keeper etc. 
• After the applicant has gathered all the necessary information and documentation, submitting the application in the portal ideally takes around 45 minutes.  
• Once the application is submitted, the FTA will review the submitted application and may request additional information regarding the application or request a financial guarantee figure to complete the registration activity, which may be submitted by the applicant online through the EMAARATAX Portal. Alternatively they may be physically delivered to the FTA office in Dubai or Abu Dhabi.An inspection may also be undertaken by the Authority to review the control and record-keeping measures in place prior to FTA approval of the DZ Registration application. 
• Once approved, the Warehouse Keeper will be able to view the DZ Registration certificate in the EMAARATAX Portal, which lists the name and address of the Warehouse Keeper, DZ Registration number, date of DZ registration, type of excise goods authorized to be entered into the DZ and the due date for renewal of the DZ. 

References

• Article 15 of the The Executive Regulation of the Federal Decree-Law No. 7 of 2017 
• Clause 2 of Article 2 of Federal Decree-Law No. 7 of 2017. 

Summary

The importance of Designated Zones (DZs) for businesses subject to excise tax. DZs are specialized, secure areas where excise goods are stored, postponing tax obligations until the goods exit the zone. Through a practical example, the article illustrates how DZs can help companies save on excise taxes. It also covers the challenges of operating a DZ, such as the need for strict security and meticulous record-keeping. Additionally, it details the steps for registering a DZ, including necessary security measures, documentation, and financial guarantees.

Disclaimer: The Content offer general guidance and should not be considered legal, financial, or tax advice. Consult qualified professionals for personalized guidance. While efforts have been made to ensure accuracy, no guarantee is provided for completeness or applicability to individual situations. Users are responsible for their interpretation and actions based on this information, at their own risk.   

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