The Federal Tax Authority (FTA) has issued Tax Public Clarification TAXP010 to explain what qualifies as a Free Zone or a Designated Zone under the Corporate Tax, Excise Tax and VAT laws. The definitions differ across these three laws, so a zone that qualifies under one law may not qualify under another. Businesses must therefore assess separately, for each tax law, whether they are located in a qualifying zone.
The clarification recognises three types of Designated Zone: Corporate Tax Designated Zone, Excise Tax Designated Zone and VAT Designated Zone. It draws on the Corporate Tax Law, VAT Law and Excise Tax Law, their Executive Regulations, Cabinet Decision No. 100 of 2023, Ministerial Decision No. 84 of 2025 and Ministerial Decision No. 229 of 2025.
Corporate Tax
A Corporate Tax Designated Zone is a zone that is listed as a Designated Zone under the VAT Law and is also included as a Free Zone under the Corporate Tax Law. A VAT Designated Zone is not automatically a Corporate Tax Designated Zone, as the specific zone must be recognised as both a VAT Designated Zone and a Free Zone for Corporate Tax purposes. Taxpayers should therefore confirm with their respective Free Zone authority whether they operate in a Free Zone or a Designated Zone for Corporate Tax purposes.
A Qualifying Free Zone Person (QFZP), which includes a branch of a Non-Resident Person registered in a Free Zone, is subject to 0% Corporate Tax on its Qualifying Income, provided all conditions under the Corporate Tax Law and related decisions are met. Qualifying Income includes income from transactions with another Free Zone Person that is the Beneficial Recipient and does not relate to an Excluded Activity, as well as income from a Qualifying Activity that is not an Excluded Activity.
Distribution of goods or materials
- Qualifying Activity: Under Ministerial Decision No. 229 of 2025, distribution of goods or materials in or from a Designated Zone is a Qualifying Activity.
- Location matters: All QFZPs must be incorporated or registered in, and operate from, a Free Zone. To fall under the distribution activity, the distribution must be conducted in or from a Corporate Tax Designated Zone.
- Scope of distribution: Buying and selling of goods, materials or component parts, and may include importation, storage, inventory management, handling, transportation and exportation.
- Conditions: Goods entering the UAE must be imported through the Designated Zone, and must be supplied to either a customer who resells, processes or alters them for sale or resale, or a public benefit entity.
- Additional procedures: Any additional procedures prescribed by the FTA must also be complied with.
Excise Tax
An Excise Tax Designated Zone is defined in the Excise Tax Law as any fenced area established as a free zone that cannot be entered or exited except through a designated road, or any area designated by the FTA as being subject to the supervision of a Warehouse Keeper, in accordance with the provisions of the Excise Tax Executive Regulation. In order for a Free Zone to qualify as an Excise Tax Designated Zone, the Free Zone must:
- Have 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 FTA.
- Be controlled and supervised by a customs department.
- Have a Warehouse Keeper appointed for the fenced Free Zone.
To determine if they are located in an Excise Tax Designated Zone, businesses must confirm with their Free Zone authority if the specific Free Zone in which they operate is considered an Excise Tax Designated Zone. In order for any geographic area other than a Free Zone to be specified by the FTA to qualify as an Excise Tax Designated Zone, the following conditions must be met:
- The area is a specified geographic area.
- There are security measures in place to restrict entry and exit of individuals and movement of Excise Goods to and from that area, according to controls specified by the FTA.
- A Warehouse Keeper must be appointed for the area.
Value Added Tax (VAT)
A VAT Designated Zone is any specific fenced geographic area, specified in the List of Designated Zones, provided it meets the conditions prescribed under Article 51(1) of the VAT Executive Regulation. The prescribed conditions are:
- The area is located in a specific fenced geographic area and must have security measures and customs controls in place to monitor entry and exit of individuals and movement of Goods to and from the area.
- The zone shall have internal procedures regarding the method of keeping, storing and processing of Goods therein.
- The operator of the zone complies with the procedures set by the FTA.
In order to determine if a company is located within a VAT Designated Zone, a company must review the List of VAT Designated Zones published by the FTA on its website, and confirm with the relevant free zone authority that the conditions provided in Article 51(1) of the VAT Executive Regulation are also met by the specific area of the VAT Designated Zone where the company is based.
Recommended Action
At Sun Management, our team can support you from start to finish, from assessing whether your business operates in a Free Zone or Designated Zone for each tax law and understanding the QFZP conditions, to reviewing your Qualifying Income and distribution activities and supporting you with compliance, so that you can continue to benefit from the available tax treatment.
