Paying customs twice is burdensome and has also become the subject of complaints to various authorities in the UAE. Frequently, goods were delivered to a free zone, especially as it is connected to a port, and then the goods were to be transferred to another free zone. The Free Zone 1 required already the 5% customs duty for the import of the goods from the free zone into the mainland. If the goods now arrived in Free Zone 2 and were processed there, then 5% of the finished product was required again for re-importation into the mainland. If the Free Zone 2 was again only a middleman, then for practically the same product customs duty was demanded twice. This was sometimes attempted to circumvent by bypassing sealed trucks from Free Zone 1 to Free Zone 2. Therefore, it was often a major problem in the mainland, which adjacent Free Zone 1.
Also a second problem arose: If goods which were already duty paid and stored in the mainland were brought from the mainland into a free zone and processed there and then the finished product returned to the mainland, the duty was practically charged again for the already duty paid raw goods.
When the idea for the introduction of VAT first came up, it was argued that it would eliminate customs clearance. It would only be necessary to pay the import turnover tax declared as VAT which would replace the customs duty. But as we now know, VAT was introduced in addition to customs. The goods that enter the country and are processed in a free zone, for example, will then, if they are exported from the free zone on the one hand invoiced with VAT and on the other hand also customs cleared.
But how do I avoid the customs clearance of especially raw material which a free zone company buys from the mainland and then sells back to the mainland after processing?
The owner of the free zone company either founds his own LLC in the mainland (onshore LLC) or concludes a corresponding agreement with the LLC through which his goods are to be sold in the mainland. This agreement between the free zone company and onshore LLC should read as follows:
Onshore LLC makes its own goods available to the free zone company for processing without selling them. It remains the property of onshore LLC even after entering the free zone. The free zone company then processes the goods and returns the finished product from the free zone to the onshore LLC. The onshore LLC remained the owner of the raw material and then clears only the work done by the free zone company on the goods. This is the customs clearance of “work load” and not the customs clearance of the final processed goods.
If this system is applied, it is advisable to contact the head of the respective customs authority in the emirate in advance and to discuss with him concrete the goods flow and the legal construction. A written agreement must be submitted between onshore LLC and the free zone company stating clearly that the ownership of the goods by onshore LLC will not be transferred to the free zone company. Onshore LLC will only order the free zone company to perform work on the raw material, i.e. to manufacture the end product from it, and at the same time undertake to pay the free zone company for the work performed. The invoice of the free zone company to the onshore company then also includes exclusively the work performance, but not the goods. Of course, this invoice is also subject to VAT, but this does not further burden the onshore company, as it then resells the finished product in the country plus VAT.
We will gladly help you to draw up such a contract between the onshore company and the free zone company and are also prepared to clarify the corresponding steps with the customs authorities in advance.