The UAE Federal Tax Authority (FTA) has issued new guidance explaining how Free Zones and Designated Zones are treated differently for Corporate Tax, value-added tax (VAT) and Excise Tax, and the conditions businesses must meet to benefit from the 0% Corporate Tax rate on Qualifying Income.

The new Public Clarification, titled TAXP010, was issued on October 2 and states that businesses must assess their status separately under each of the UAE’s three tax regimes.

A key point is that a company’s presence in a VAT Designated Zone does not automatically mean it operates in a Designated Zone for Corporate Tax purposes.

The FTA said businesses must separately determine whether the area in which they operate qualifies as a Free Zone or Designated Zone under each relevant tax law.

The clarification does not introduce new legislation. The FTA stressed that the document merely sets out its position and “does not amend, nor is it intended to amend, existing legislation”.

Corporate Tax rules for UAE Free Zones

For Corporate Tax purposes, a Free Zone is a specific, defined geographical area within the UAE that has been designated by a Cabinet decision.

However, the definition of a Corporate Tax Designated Zone is narrower. Such an area must be both a Designated Zone under the VAT rules and recognised as a Free Zone under the Corporate Tax Law.

The FTA explicitly stated that a VAT Designated Zone is not necessarily or automatically considered a Corporate Tax Designated Zone.

Businesses should check with their Free Zone authority to determine whether their place of business qualifies as a Free Zone or Designated Zone for Corporate Tax purposes.

Qualifying Free Zone Persons may benefit from the 0% Corporate Tax rate on Qualifying Income, provided they meet all relevant conditions.

Qualifying Income may include income from transactions with another Free Zone Person, provided the other party is the beneficial recipient of the transaction and the transaction does not relate to an Excluded Activity.

Income derived from a Qualifying Activity that is not an Excluded Activity may also benefit from the 0% rate if the required conditions are met.

Conditions for the 0% tax rate for goods distribution companies

The new guidance also provides specific clarification for businesses engaged in distributing goods and materials.

The distribution of goods or materials in or from a Corporate Tax Designated Zone is one of the Qualifying Activities specified in Ministerial Decision No. 229 of 2025.

Although all Qualifying Free Zone Persons must be registered or established in a Free Zone and operate from there, a business seeking to qualify through distribution activities must conduct those activities in or from a Designated Zone.

The FTA said: “Accordingly, a Qualifying Free Zone Person engaged in a distribution activity may benefit from the 0% Corporate Tax rate on its Qualifying Income only if the distribution activity is conducted in or from a Corporate Tax Designated Zone.”

All other relevant conditions must also be met.

The relevant rules cover activities such as the buying and selling of goods, materials and components. They may also include their importation, storage, inventory management, handling, transportation and export, subject to the specified conditions.

What happens if a Free Zone company no longer meets the requirements?

The new clarification also outlines the consequences of failing to meet the requirements for maintaining Qualifying Free Zone Person status.

If a business fails to meet the required conditions at any point during a Tax Period, it may cease to be treated as a Qualifying Free Zone Person from the beginning of that Tax Period and for the following four Tax Periods.

Correctly determining Free Zone or Designated Zone status is therefore crucial for businesses seeking to benefit from Corporate Tax incentives.

VAT Designated Zones in the UAE

Different conditions apply under the VAT regime.

A VAT Designated Zone is a Free Zone listed in the relevant Cabinet decision that also meets the conditions set out in the VAT Executive Regulations.

For a VAT Designated Zone to be treated as outside the UAE for relevant purposes, it must meet specific requirements. These include being a clearly defined, fenced geographical area where security measures and customs controls are in place.

Internal procedures must also be in place for the handling, storage and processing of goods, while the zone operator must comply with FTA procedures.

Businesses should consult the FTA’s official list of VAT Designated Zones and obtain confirmation from the relevant Free Zone authority that the area in which they are located meets the necessary conditions.

Current VAT guidance also states that Free Zones generally fall within the UAE’s VAT territory unless they meet the requirements for Designated Zone status.

Special tax treatment applies to certain transactions involving goods in these zones, but services supplied in Designated Zones remain subject to the UAE’s standard VAT rules.

Excise Tax Designated Zones

Excise Tax has a separate definition.

An Excise Tax Designated Zone may be a specified Free Zone or geographical area that meets the conditions set out in the Excise Tax Law and its Executive Regulations.

To qualify, a Free Zone must have security measures controlling the entry and exit of people and the movement of excise goods. It must also be subject to the control and supervision of the customs authority and have an appointed warehouse keeper.

Businesses are advised to verify their status with the relevant Free Zone authority or warehouse keeper, depending on their circumstances.

What should UAE Free Zone businesses check?

The central message of the new guidance is that the terms “Free Zone” and “Designated Zone” do not have the same meaning across all tax regimes.

Each business’s status must be assessed separately for Corporate Tax, VAT and Excise Tax.

For Corporate Tax in particular, companies seeking to benefit from the preferential rate should confirm with their Free Zone authority that their place of business is recognised for the relevant purposes. They should not assume that VAT Designated Zone status will produce the same outcome under the Corporate Tax regime.

The FTA clarification applies in line with the effective dates of the relevant legislation and does not itself introduce any changes to those laws.