Free Zones and Designated Zones: One Label Does Not Fit All Three UAE Taxes

A business set up in a UAE free zone is not automatically in a "free zone" or a "designated zone" for every tax. The Federal Tax Authority's Tax Public Clarification TAXP010 says so directly: the definitions differ between Corporate Tax, Excise Tax and VAT, and businesses must determine their position for each tax law separately.

The label decides real money. For Corporate Tax it can decide whether a free zone distributor keeps its 0% rate. For VAT and Excise Tax it decides whether goods moving into, out of and within an area are treated as inside or outside the UAE.

Corporate Tax: two labels, two tests

A juridical person incorporated, established or registered in a Corporate Tax Free Zone is a Free Zone Person. It becomes a Qualifying Free Zone Person, paying 0% on Qualifying Income, only if it meets the conditions in the Corporate Tax Law, Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025.

A Corporate Tax Designated Zone is narrower, and it is a concept of its own. It is defined not in the Corporate Tax Law but in Article 1 of Cabinet Decision No. 100 of 2023: "a designated zone according to what is stated in" the VAT Law, "and which has been included as a Free Zone in accordance with the Corporate Tax Law." So it must pass two tests at once — on the VAT list, and a Corporate Tax Free Zone.

TAXP010 is explicit that a VAT Designated Zone is not automatically a Designated Zone for Corporate Tax purposes. There is no separately published list of Corporate Tax Designated Zones, which is why the FTA expects every taxpayer to confirm its position with its own free zone authority.

Why it matters most for traders and distributors

Every Qualifying Free Zone Person must be registered in, and operate from, a Free Zone. A distributor has to go further. Ministerial Decision No. 229 of 2025 makes "distribution of goods or materials in or from a Designated Zone" a Qualifying Activity, and defines it with three conditions:

1. The buying and selling of goods, materials or parts, which may include importing, storing, managing stock, handling, transporting and exporting them, is carried out in or from a Designated Zone.
2. Goods or materials entering the State are imported through the Designated Zone.
3. They are supplied to a customer who resells, processes or alters them for sale or resale, or to a public benefit entity.

So a free zone trading company selling to end users, importing through a mainland port, or operating from a free zone that is not a Corporate Tax Designated Zone, may not be earning qualifying distribution income at all. Distributors must also follow the additional procedures the FTA sets for the activity, including the agreed-upon procedures report.

The substance has to sit in the same zone

The Designated Zone also reaches the substance test. Article 8 of Cabinet Decision No. 100 of 2023 requires a Qualifying Free Zone Person to carry out its core income-generating activities, and to hold adequate assets and qualified full-time employees, "in a Free Zone or a Designated Zone, depending on where such activities are required to be conducted." Outsourcing is allowed only to a person in the same kind of zone, under adequate supervision. For a distributor, that means the warehouse, the stock-handling and the people doing the work belong in the Designated Zone, not merely somewhere in the free zone.

Excise Tax: a fenced and supervised area

The Excise Tax Law defines a Designated Zone as a fenced free zone that cannot be entered or exited except through a designated road, or any area the FTA has designated as subject to the supervision of a Warehouse Keeper.

A fenced free zone qualifies only if it has security measures restricting the entry and exit of individuals and the movement of excise goods, is controlled and supervised by a customs department, and has a Warehouse Keeper appointed for it. An area outside a free zone can qualify if it is a specified geographic area with the same security measures and an appointed Warehouse Keeper, who must apply to the FTA to register it. Businesses handling excise goods should confirm the status with the free zone authority or the Warehouse Keeper before relying on any suspension of Excise Tax.

VAT: being on the list is only the first step

For VAT, a Designated Zone is one listed in Cabinet Decision No. 59 of 2017 and its amendments. When it qualifies, it is treated as outside the State for VAT on goods. But the list is not enough on its own. Article 51(1) of the VAT Executive Regulation adds three conditions: the zone is a specific fenced area with security measures and customs controls on people and goods; it has internal procedures for keeping, storing and processing goods; and its operator complies with the procedures set by the FTA.

TAXP010 therefore asks businesses to check the FTA's published list and to confirm with their free zone authority that the specific part of the zone where they are based meets those conditions. Remember too that the special treatment is for goods: under Article 51(6), the place of supply of services is inside the State when it is in a Designated Zone, with an exception for shipping and delivery services connected to goods that leave the State.

What to do now

1. Get written confirmation from your free zone authority of your status for Corporate Tax, VAT and, where relevant, Excise Tax — for the unit or plot you actually operate from, not just the free zone's name.
2. If you rely on the distribution activity for 0%, map the supply chain: where goods enter the UAE, where they are stored, and who buys them.
3. Review VAT on goods moving between Designated Zones and the mainland, and check that invoicing and customs records agree.
4. Keep the audited financial statements every Qualifying Free Zone Person must prepare under Ministerial Decision No. 84 of 2025.
5. Revisit the position whenever you move premises, open a new warehouse or add a business line.

TAXP010 states the FTA's position on existing law and does not amend it, so it applies from the date the relevant legislation took effect.

How BIFI Partners helps

BIFI Partners reviews free zone businesses' zone status for Corporate Tax, VAT and Excise Tax and helps obtain and document the confirmations TAXP010 expects. For trading and distribution companies, we map the supply chain against the Ministerial Decision No. 229 of 2025 conditions, run Qualifying Free Zone Person health checks, support audit readiness, and prepare Corporate Tax and VAT returns.