As the UAE continues to position itself as a global hub for trade and investment, the introduction of Corporate Tax under Federal Decree-Law No. 47 of 2022 has prompted businesses to review their tax positions carefully. However, the law provides a strategic advantage to entities operating in Designated Free Zones — allowing them to benefit from a 0% Corporate Tax rate if they qualify as a Qualifying Free Zone Person (QFZP).
In this article, we explore how companies can leverage this opportunity, particularly those engaged in distribution activities from a Designated Zone.
✅ What Is a Qualifying Free Zone Person (QFZP)?
A QFZP is a Free Zone entity that meets specific conditions and earns income from Qualifying Activities, enabling it to benefit from a 0% Corporate Tax rate. One of the key qualifying activities is the distribution of goods or materials in or from a Designated Zone.
📦 What Is a Qualifying Distribution Activity?
Under Ministerial Decision No. 265 of 2023, distribution qualifies as a zero-tax activity only if:
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It involves purchase, storage, handling, inventory control, logistics, and sales of tangible goods.
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All core activities take place within the Designated Free Zone.
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The goods are sold to resellers or processors, not end-users.
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The company retains legal ownership of the goods.
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Import/export is routed through the Designated Zone.
Examples of Qualifying Income:
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Selling to another Free Zone company acting as the beneficial recipient
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Exporting goods via high-sea sales or third-port trade
Examples of Non-Qualifying Income (subject to 9% tax):
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Selling directly to individual consumers or end-users
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Handling transactions from outside the Free Zone
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Acting solely as a broker or agent
🏢 Substance Requirements: It’s Not Just About a License
Simply holding a license in a Free Zone does not make a company eligible for 0% tax. The Federal Tax Authority (FTA) requires companies to prove they have adequate economic substance in the Free Zone.
This includes:
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Physical office and warehouse (Flexi desks are not sufficient)
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Qualified full-time employees working within the zone
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Control over key business operations such as:
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Inventory and logistics
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Pricing and invoicing
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Import/export documentation
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Client negotiations
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In addition, the company must incur operating expenses within the zone—such as rent, salaries, utilities, and depreciation—demonstrating real presence and functionality.
📋 Compliance Checklist for Free Zone Companies
Here’s what a Free Zone business must ensure to retain 0% tax eligibility:
✅ Do:
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Maintain office and operations inside the Free Zone
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Employ qualified staff in the zone (with gate pass evidence)
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Retain legal title of goods — don’t act as an agent
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Conduct board meetings and strategic decisions in the zone
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Keep proper Transfer Pricing documentation
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Prepare audited financial statements annually
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Ensure non-qualifying income stays below the de minimis threshold:
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Less than AED 5 million, or
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Less than 5% of total revenue
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❌ Don’t:
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Operate sales or inventory functions from mainland or outside UAE
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Use Flexi desks or virtual addresses as proof of substance
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Sell to end-users and expect 0% tax
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Mix mainland and Free Zone operations without segregation
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Ignore regular compliance reviews
⚠️ Penalty for Non-Compliance
Failing to meet QFZP requirements results in:
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Immediate loss of 0% tax benefit from the beginning of the non-compliant period
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Taxation at 9% for that year and the following 4 years
🧠 Final Thoughts
While the UAE’s Corporate Tax Law introduces new compliance obligations, it also opens up significant tax-saving opportunities for well-structured Free Zone businesses. Companies engaged in distribution, trading, or logistics can still enjoy the benefits of a 0% tax regime, provided they demonstrate real economic substance and adhere to regulatory requirements.
Free Zone businesses must act now to review, adjust, and align their operations to ensure continued eligibility. When done right, this strategy not only saves tax but also strengthens long-term compliance and business reputation.
