Key considerations arising from Tax Public Clarification TAXP010 issued by the Federal Tax Authority

Free zone location does not automatically confer a 0% rate

Businesses established in a UAE free zone commonly assume that their profits are subject to Corporate Tax at 0%. This assumption is understandable, but in many cases it is only partially correct.

The Federal Tax Authority (FTA) has set out the detailed position in Tax Public Clarification TAXP010, Free Zones and Designated Zones for Tax Purposes. The clarification confirms that, for Corporate Tax purposes, the precise location of a business and the classification of that location under the law may determine whether its profits are taxed at 0% or at the standard rate.

Free Zone and Designated Zone: the distinction

Under the Corporate Tax Law, a Free Zone is a defined geographic area in the UAE that the Cabinet has specified by decision, upon the recommendation of the Minister. A company incorporated, established or registered in a Free Zone is a Free Zone Person. Where such a company also satisfies the conditions set out in Article 18, it qualifies as a Qualifying Free Zone Person (QFZP), the status that gives access to the 0% rate.

A Designated Zone is defined in Cabinet Decision No. 100 of 2023 as an area that is designated under the VAT Law (by reference to the List of Designated Zones in Cabinet Decision No. 59 of 2017) and that has been included as a Free Zone under the Corporate Tax Law.

Accordingly, every Designated Zone is a Free Zone, but not every Free Zone is a Designated Zone. This distinction is of particular significance to businesses that trade in goods.

Reliance on the VAT list

A common error is to consult the FTA’s VAT List of Designated Zones, locate one’s area on it, and conclude that the area is also a Designated Zone for Corporate Tax purposes.

The FTA has confirmed that this conclusion does not follow automatically. For Corporate Tax , an area must satisfy two requirements concurrently: it must be a VAT Designated Zone, and it must also be recognised as a Free Zone for Corporate Tax purposes. Satisfying only one of these requirements is insufficient.

Example: the VAT list is not conclusive. Company A operates a logistics business from a fenced compound that appears on the VAT list, and its finance team assumes that the Corporate Tax position is settled. Enquiry with the free zone authority establishes that the compound has never been specified as a Free Zone by Cabinet decision under the Corporate Tax Law. For VAT purposes, Company A is located in a Designated Zone. For Corporate Tax purposes, it is not, and any tax planning based on the contrary assumption is unsound.

The FTA’s guidance is consistent on this point: the VAT list should not be relied upon in isolation, and the status of the location should be confirmed directly with the relevant free zone authority.

Application of the 0% rate

The 0% rate is not a blanket exemption for all income earned by a free zone company. It applies only to Qualifying Income, and only to a QFZP that continues to meet the conditions prescribed by the Corporate Tax Law, Cabinet Decision No. 100 of 2023, Ministerial Decision No. 229 of 2025 and any further conditions the Minister may prescribe.

Income may be Qualifying Income through either of two routes.

The first route is income from transactions with other Free Zone Persons. Such income may qualify, provided that the counterparty is the Beneficial Recipient and the activity is not an Excluded Activity. A Beneficial Recipient is the party that uses and enjoys the goods or services itself, without any obligation to pass them on to another person.

The second route is income derived from a Qualifying Activity, such as those listed in Ministerial Decision No. 229 of 2025, provided that the activity is not an Excluded Activity. Under this route, income from mainland customers may also qualify.

Under either route, the income must not be attributable to a domestic or foreign permanent establishment, must not be derived from immovable property, and must not fall within the categories that the Decision treats as taxable.

Example: a genuine Beneficial Recipient. Company B, a QFZP, provides IT support services to Company C, another free zone company, which uses the services to operate its own office systems. Company C is the party that actually enjoys the services and is therefore the Beneficial Recipient. Provided that IT support is not an Excluded Activity, the fee earned by Company B may be Qualifying Income taxed at 0%.

Example: no Beneficial Recipient.Assume instead that Company C acquires the same IT support services solely to resell them to a mainland client under a back-to-back contract. Company C is obliged to pass the services on and is therefore not the Beneficial Recipient. Company B can no longer rely on the first route, and its fee qualifies only if the services themselves constitute a Qualifying Activity.

Distributors of goods

For businesses that trade in goods, the Designated Zone requirement is of central importance.

Ministerial Decision No. 229 of 2025 identifies the “distribution of goods or materials in or from a Corporate Tax Designated Zone” as a Qualifying Activity. Every QFZP must be established in, and operate from, a Free Zone. A distributor must additionally conduct its distribution activity in or from a Designated Zone.

Distribution means the purchase and sale of physical goods, materials and component parts. It may also include related activities such as importing, storing, inventory management, handling, transporting and exporting. The following conditions apply. The activity must be carried out in or from the Designated Zone. Goods entering the UAE must be imported through that zone. The purchaser must be either a customer that resells, processes or alters the goods for sale, or a public benefit entity. The distributor must also comply with any additional procedures prescribed by the FTA.

Example: all conditions satisfied.Company D maintains its warehouse in an area that is both a VAT Designated Zone and a Corporate Tax Free Zone. It imports spare parts through that zone and sells them to mainland garages, which resell them to motorists. All conditions are met. Although its customers are located on the mainland, Company D’s distribution income may be Qualifying Income taxed at 0%.

Example: location is not a Designated Zone. Company E conducts the same business from an office in a Free Zone that is not a Designated Zone. Its parts are cleared through a mainland port and delivered directly to garages. Although Company E is located in a free zone, its distribution is not carried out in or from a Designated Zone, and its sales to mainland garages therefore fall outside this Qualifying Activity.

Example: location correct, customer ineligible.Company D also sells a limited quantity of parts directly to vehicle owners for their own use. These buyers neither resell nor process the goods. Those sales fall outside the distribution Qualifying Activity, notwithstanding that Company D is located in the correct zone.

Consequences of non-compliance: loss of status for five Tax Periods

The consequences of losing QFZP status are significant. If a QFZP fails to meet any of the conditions at any time during a Tax Period, it loses its status with effect from the beginning of that Tax Period and remains outside the regime for the following four Tax Periods. The total disqualification period is therefore five Tax Periods, as provided in Article 5(2) of Ministerial Decision No. 229 of 2025.

Example: the effect of a single breach. Company F, a QFZP with a calendar-year Tax Period, breaches a condition in September 2026. It ceases to be a QFZP with effect from 1 January 2026 and remains outside the regime until the end of 2030.

The effect operates both retrospectively and prospectively. Although the breach occurred in September, the 0% rate is withdrawn from the preceding January. Company F can re-enter the regime only from 2031, and only if it again satisfies all of the conditions. Throughout the five-year period, its income is taxed under the standard Corporate Tax rules.

Practical implications

TAXP010 confirms that the 0% rate depends on strict compliance with the prescribed conditions. Businesses should first confirm with their free zone authority that their location is a Free Zone for Corporate Tax purposes. Businesses that trade in goods should also confirm that the location is a Corporate Tax Designated Zone, and not merely listed for VAT purposes.

Each income stream should then be assessed separately to determine whether it qualifies through the Free Zone Person route, with a genuine Beneficial Recipient as counterparty, or through the Qualifying Activity route. Distributors should map the full movement of their goods: imported through the Designated Zone and supplied to customers that resell or process them, with all FTA procedures observed.

Finally, compliance should be monitored on a continuous basis throughout the year rather than reviewed only at year end. As the example of Company F shows, a single lapse may result in the loss of the 0% rate for five Tax Periods.

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