How logistics services constitute the qualifying activity in a free zone

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The UAE corporate tax law provides significant benefits for businesses operating in free zones. The 0% corporate tax rate under free zone provisions applies to transactions and activities conducted from within the prescribed geographical areas of free zones, including Designated Zones.

A Qualifying Free Zone Person (QFZP) can benefit from the 0% corporate tax rate when it derives qualifying income from transactions involving specific qualifying activities. This benefit applies even when services or goods are sold to non-free zone persons, provided the income comes from qualifying activities.

According to the UAE Federal Tax Authority (FTA), QFZPs can benefit from the 0% corporate tax rate when selling services or goods to non-free zone persons, as long as they derive qualifying income from qualifying activities.

These qualifying activities include manufacturing of goods or materials, processing of goods or materials, trading of qualifying commodities, holding of shares and other securities for investment purposes, ownership, management and operation of ships, reinsurance services, fund management services, wealth and investment management services, headquarter services to related parties, treasury and financing services to related parties, financing and leasing of aircraft, distribution of goods or materials in or from a Designated Zone, and logistics services.

Qualifying Activities also encompass ancillary activities. These are activities that are necessary for performing the main qualifying activity or make a minor contribution to the main qualifying activity. They must be so closely related to the main qualifying activity that they shouldn’t be regarded as separate activities.

Logistics services represent a key qualifying activity under UAE corporate tax law. The definition of logistics services encompasses the storage and transportation of goods or materials on behalf of another person, without taking title to the goods or materials belonging to that other person.

These services include various activities such as cargo handling, warehousing, container storage, transport agency services, customs brokerage services, order and inventory management, freight forwarding and brokerage services, document preparation, packing and unpacking, and other related services.

The law places no limitations on the mode of delivery, providing flexibility for logistics operations. However, it’s important to note that logistics services specifically do not include the movement of people.

According to the FTA’s corporate tax guide, certain activities might qualify as ancillary to the main qualifying activity of logistics services. These ancillary activities must naturally and integrally complement the main qualifying activity while meeting the conditions for ancillary activities. Examples include supply chain management, customs brokerage, and customer service.

However, this classification doesn’t automatically mean that any activity potentially ancillary to logistics services will be treated as a qualifying activity on its own right or standalone basis when considered individually.

An important consideration for free zone logistics providers involves last mile delivery services. When a free zone person performs most of its logistics services within a free zone for customers in the UAE outside a free zone or for foreign customers, but provides last mile delivery services outside of the free zone in the UAE or in a foreign country, these last mile delivery services will still form part of the free zone person’s logistics services qualifying activity.

To illustrate these principles, consider company F, a free zone person operating as a logistics service provider with business operations in a free zone. During the relevant tax period, company F rendered various services to its customer, company R, a non-free zone person operating as a clothing retailer.

The services provided included:

All the above services that company F provided involve the qualifying activity of logistics services, making them eligible for the 0% corporate tax rate under UAE free zone provisions.

Sameer Mishra is a senior journalist based in the UAE