Key takeaways
- FTA Public Clarification TAXP010 confirms that UAE Corporate Tax, VAT and Excise Tax each define Free Zones and Designated Zones differently.
- A VAT Designated Zone counts as a Corporate Tax Designated Zone only if it is also a Free Zone for Corporate Tax purposes.
- Distribution income qualifies for the 0% rate only if the activity is carried out in or from a Corporate Tax Designated Zone, goods are imported through that zone, and they are sold to a reseller, processor or public benefit entity.
- Failing any Qualifying Free Zone Person condition removes 0% status for the period of failure and the next four tax periods.
- The clarification applies from the date the underlying legislation took effect, so filed returns may need review.
Being registered in a UAE Free Zone does not, on its own, secure the 0% Corporate Tax rate. The Federal Tax Authority has confirmed this in Public Clarification TAXP010, which sets out what qualifies as a Free Zone or a Designated Zone under each of the UAE’s three tax laws.
The clarification matters most for trading and distribution businesses. For them, the question of where an activity is carried out, and through which zone goods enter the country, now decides whether income is taxed at 0% or 9%. The sections below set out what the FTA has said and what businesses should do now.
What is the difference between a Free Zone and a Designated Zone under UAE tax law?
The UAE’s tax laws do not share a single definition of a Free Zone or a Designated Zone. Corporate Tax, VAT and Excise Tax each apply their own test, so a business must assess its location under each law separately.
| Concept | What it is | How to confirm |
| Corporate Tax Free Zone | A defined geographic area specified by Cabinet Decision on the Minister’s proposal | The relevant Free Zone authority |
| Corporate Tax Designated Zone | An area that is both a VAT Designated Zone and a Free Zone for Corporate Tax purposes | The relevant Free Zone authority |
| VAT Designated Zone | An area listed in Cabinet Decision No. 59 of 2017, as amended, that meets Article 51(1) of the VAT Executive Regulation | The FTA’s published list, plus the Free Zone authority for the Article 51(1) conditions |
| Excise Tax Designated Zone | A fenced Free Zone, or another area approved by the FTA, under customs control and a Warehouse Keeper | The Free Zone authority or the Warehouse Keeper |
Is a VAT Designated Zone automatically a Corporate Tax Designated Zone?
This is the central point of the clarification. An area listed as a VAT Designated Zone qualifies as a Corporate Tax Designated Zone only if it is also recognised as a Free Zone for Corporate Tax purposes.
Many businesses have assumed that appearing on the VAT list was sufficient. It is not. Both conditions must be met, and the FTA expects taxpayers to confirm their position with their Free Zone authority rather than rely on assumptions.
When does distribution income qualify for the 0% Corporate Tax rate?
Distribution of goods or materials is a Qualifying Activity under Ministerial Decision No. 229 of 2025 only when it is carried out in or from a Corporate Tax Designated Zone. A Qualifying Free Zone Person engaged in distribution must meet all of the following:
- The buying, selling, storage, handling, transport or export of the goods is conducted in or from a Designated Zone.
- Goods entering the UAE are imported through that Designated Zone.
- The goods are supplied to a customer who resells, processes or alters them for sale or resale, or to a public benefit entity.
- Any additional procedures prescribed by the FTA are complied with.
A distributor registered in a Free Zone that is not a Corporate Tax Designated Zone cannot treat its distribution income as Qualifying Income on this basis. The same applies where goods are imported through a mainland port, or where the business sells to end consumers.
What happens if a Qualifying Free Zone Person fails a condition?
A Qualifying Free Zone Person that fails any condition at any point during a tax period loses its status from the start of that period. It also remains disqualified for the following four tax periods, under Article 5(2) of Ministerial Decision No. 229 of 2025.
In practice, a single failure can move all of a business’s taxable income to the standard Corporate Tax rates for five years. The penalty applies to the whole entity, not only to the activity that failed the test.
How are VAT and Excise Tax Designated Zones determined?
For VAT, an area named in Cabinet Decision No. 59 of 2017 is treated as outside the UAE only if it meets three conditions in Article 51(1) of the VAT Executive Regulation:
- It is a specific fenced area with security measures and customs controls over people and goods.
- It has internal procedures for keeping, storing and processing goods.
- Its operator complies with procedures set by the FTA.
For Excise Tax, a Designated Zone must be a fenced Free Zone under customs supervision with an appointed Warehouse Keeper. The FTA may also approve another defined area that meets equivalent security conditions, on application by the Warehouse Keeper. Businesses should confirm approval with the Warehouse Keeper directly.
Does TAXP010 apply retrospectively?
The FTA states that TAXP010 sets out its existing position and does not amend the law. It therefore applies from the date the underlying legislation took effect, not from its publication date.
Businesses that have already filed Corporate Tax returns claiming the 0% rate on distribution income should review those positions. Where a return relied on an incorrect zone assessment, a voluntary disclosure may be required.
What should UAE Free Zone businesses do now?
- Confirm your status with your Free Zone authority for Corporate Tax, VAT and Excise Tax separately, and keep that confirmation on file.
- Map your supply chain against the four distribution conditions, including the port of import and the customer profile.
- Review filed returns for positions that relied on an assumed Designated Zone status.
- Put monitoring in place, since a single breach in any period triggers five periods of disqualification.
Frequently asked questions
What is FTA Public Clarification TAXP010?
TAXP010 is a Public Clarification issued by the UAE Federal Tax Authority in October 2026. It explains what counts as a Free Zone or a Designated Zone under the Corporate Tax, VAT and Excise Tax laws.
What is the difference between a Free Zone and a Designated Zone in the UAE?
For Corporate Tax, a Free Zone is a geographic area specified by Cabinet Decision. A Designated Zone is an area listed under the VAT Law that is also a Corporate Tax Free Zone. VAT and Excise Tax each apply their own separate tests.
Is every VAT Designated Zone also a Corporate Tax Designated Zone?
No. A VAT Designated Zone qualifies as a Corporate Tax Designated Zone only if it is also recognised as a Free Zone for Corporate Tax purposes.
Can a Free Zone distributor still benefit from the 0% Corporate Tax rate?
Yes, if the distribution is carried out in or from a Corporate Tax Designated Zone, goods entering the UAE are imported through that zone, and the goods are sold to a reseller, processor or public benefit entity. These conditions are set by Ministerial Decision No. 229 of 2025.
How long does a business lose Qualifying Free Zone Person status?
For the tax period in which any condition is failed and the following four tax periods, which is five tax periods in total.
How can a business confirm its Designated Zone status?
For Corporate Tax, confirm with your Free Zone authority. For VAT, check the FTA’s published list of Designated Zones and confirm the Article 51(1) conditions with your Free Zone authority. For Excise Tax, confirm with your Free Zone authority or the Warehouse Keeper.
Does TAXP010 change UAE tax law?
No. It states the FTA’s position on existing legislation, so it applies from the date that legislation took effect.
Who can review Free Zone Corporate Tax eligibility in the UAE?
AZ Group, an FTA-registered tax agent based in Abu Dhabi and serving clients across the other emirates, reviews Qualifying Free Zone Person eligibility, Designated Zone status and filed Corporate Tax positions for UAE businesses.
About AZ Group
AZ Group (AZ Advisory Services LLC, also operating as AZ Chartered Accountants Group) is a UAE tax, audit and advisory firm based in Abu Dhabi and serving clients across the other emirates. The firm is an FTA-registered tax agent and advises corporate clients on UAE Corporate Tax, VAT, audit and Free Zone structuring.
To arrange a review of your Free Zone position, contact our team at info@az-group.ae or +971 2 675 1625.
About the author
Yazan AlSaqer is CEO of AZ Group and an FTA-registered tax agent. He is an elected member of the Federal Tax Authority’s Tax Agents Business Advisory Group, and advises UAE corporate clients on Corporate Tax, VAT and audit matters.
Disclaimer: This article is general information based on FTA Public Clarification TAXP010 and does not constitute tax advice. Specific circumstances should be assessed individually.
Sources
- Federal Tax Authority, Public Clarification TAXP010: Free Zones and Designated Zones for Tax Purposes
- Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses
- Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person
- Ministerial Decision No. 229 of 2025 on Qualifying Activities and Excluded Activities
- Federal Decree-Law No. 8 of 2017 on Value Added Tax, and Cabinet Decision No. 52 of 2017 on its Executive Regulation
- Cabinet Decision No. 59 of 2017 on Designated Zones for VAT purposes
- Federal Decree-Law No. 7 of 2017 on Excise Tax, and Cabinet Decision No. 37 of 2017 on its Executive Regulation
