The 'Qualifying' distribution rule: How UAE free zone businesses can secure 0% tax

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The UAE Corporate Tax framework provides significant advantages for businesses operating in free zones, particularly through the 0% tax rate available to Qualifying Free Zone Persons (QFZPs).

While this benefit generally applies across all free zones, there’s a crucial distinction when it comes to distribution activities that many businesses need to understand.

Under Ministerial Decision No. (265) of 2023, distribution activities must meet specific criteria to qualify for the 0% tax rate. Most importantly, for distribution income to be considered “qualifying,” the activity must be conducted in or from a designated zone, and any goods entering the UAE must pass through that designated zone.

One, distribution of goods covers tangible and movable items but excludes intangible products like licences, software, and financial services. However, goods with embedded software or firmware where income cannot be separately identified remain within scope.

Secondly, for distribution to qualify, goods must be sold to customers who will either resell them or process them for resale purposes. Distribution to end users who consume the products does not qualify as a qualifying activity.

Let’s consider this scenario: Company F operates as a Free Zone Person in a designated zone and purchases goods from a UAE entity outside the free zone. These goods were either manufactured locally or previously imported by another entity. Company F then sells these goods to a retailer/ distributor outside the free zone.

Even though the goods are transferred directly from the original manufacturer to the retailer in the UAE outside a Free Zone without physically passing through the designated zone, Company F’s activities are still considered as qualifying.

This is because company F conducts its activities in or from a designated zone and the goods were already in the UAE when Company F purchased them, eliminating the requirement for them to pass through the designated zone upon subsequent sale.

Let’s understand this with another example. Company D is a Free Zone Person operating in a designated zone that purchases goods from a foreign manufacturer in Country A and sells these goods to a retailer/distributor in the UAE. Company D earns a profit on the goods sold to the retailer/distributor.

The goods are shipped by the manufacturer in Country A directly to Company D’s facility in the designated zone, where they officially enter the UAE through the designated zone.

Since Company D conducts its activities in or from a designated zone and the foreign goods entering the UAE are imported through that designated zone, Company D is performing qualifying activities.

However, if the same goods were imported into the UAE through a different entry point (such as another port or customs facility) before reaching Company D, the distribution activities would not qualify for the preferential tax treatment, regardless of Company D’s location in the designated zone.

Sameer Mishra is a senior journalist based in the UAE