Context
Many businesses use the terms “free zone” and “designated zone” interchangeably, assuming they have the same meaning across all taxes. This is not the case.The FTA has issued Public Clarification TAXP010 to set out, in one place, how a Free Zone and a Designated Zone are defined under the Corporate Tax (CT), Excise Tax and VAT laws, and where these definitions differ. The FTA’s message is clear: a business must test its location separately under each tax law. The clarification does not change the law. It states the FTA’s position and applies from the date the relevant legislation took effect.
What the FTA has clarified
- VAT status does not carry over to CT. A VAT Designated Zone is not automatically a Designated Zone for CT. It must also be a Free Zone under the CT Law.
- Distribution income needs a CT Designated Zone. A Qualifying Free Zone Person (QFZP) gets 0% on distribution income only where goods are distributed in or from a CT Designated Zone and all related conditions are met.
- The specific area where the business is based must also meet the Article 51(1) conditions, as confirmed by the Free Zone authority.
- Excise follows its own test. Customs supervision and an FTA-registered Warehouse Keeper are required. Areas outside free zones can qualify if the Warehouse Keeper applies to the FTA.
Illustrative summary
| CT Free Zone | CT Designated Zone | Excise Designated Zone | VAT Designated Zone | |
|---|---|---|---|---|
|
What it is
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A defined area in the UAE specified by Cabinet Decision on the Minister’s proposal.
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A zone that is on the VAT Designated Zone list and is also a Free Zone for CT. Both tests must be met.
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A fenced free zone, or any other area specified by the FTA, supervised by an FTA-registered Warehouse Keeper.
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A fenced area listed in Cabinet Decision No. 59 of 2017 (as amended) that meets Article 51(1) of the VAT Executive Regulation.
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|
Key conditions
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Entity must be incorporated, established or registered in the Free Zone and meet all QFZP conditions.
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For the distribution activity: goods imported through the zone and distributed in or from it, to resellers / processors or public benefit entities.
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Security controls on entry and exit of people and excise goods; customs supervision (for free zones); appointed Warehouse Keeper.
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Fencing, security and customs controls; internal procedures for keeping and processing goods; operator follows FTA procedures.
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Why it matters
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Gateway to the 0% CT rate on Qualifying Income.
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0% CT on distribution income depends on it.
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Relevant to the suspension of Excise Tax on excise goods held in or moved between Designated Zones.
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Supplies of goods in the zone may be treated as outside the UAE for VAT, subject to conditions.
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Who confirms
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Relevant Free Zone authority.
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Relevant Free Zone authority.
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Free Zone authority or the Warehouse Keeper (FTA approval).
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FTA published list, plus Free Zone authority for the specific area.
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What businesses should do now
- Map each legal entity, warehouse and plot to its status under CT, VAT and Excise. Do not rely on the licence address alone.
- Obtain written confirmation from the Free Zone authority or Warehouse Keeper, and check the current FTA Designated Zone list.
- QFZPs in trading or distribution should confirm goods are imported through, and distributed in or from, a CT Designated Zone.
- Revisit VAT treatment of goods supplied within zones and any Excise suspension positions that relied on location assumptions.
- Keep the evidence on file and repeat the check whenever you move premises or add a new warehouse.
Illustrative examples (GT view)
Jebel Ali Free Zone (JAFZA, North-South), a Free Zone and a Designated Zone
- VAT: It has been on the FTA's Designated Zone list since 1 January 2018. Supplies of goods inside the zone can be treated as outside the UAE, provided the specific area meets the Article 51(1) conditions.
- Corporate Tax: JAFZA is a free zone and is also on the VAT list, so it can meet both tests needed to count as a Corporate Tax Designated Zone.
DMCC (Jumeirah Lakes Towers), a Free Zone that is not a Designated Zone
- VAT: DMCC is not on the FTA's Designated Zone list. For VAT, it is treated the same as the mainland.
- Corporate Tax: A DMCC entity can still be a QFZP, because it is registered in a free zone. However, DMCC is not on the VAT list, so it cannot be a Corporate Tax Designated Zone.
- Effect on the business: A trader based in DMCC cannot rely on the distribution qualifying activity for goods distributed from DMCC. It needs a different qualifying activity, or it must run distribution from a Designated Zone.
How Grant Thornton can help
Our UAE Tax team can confirm your zone status under each tax law, document the evidence and assess the impact on your QFZP, VAT and Excise positions before your next filing.
This alert is for general information only and does not constitute tax advice. It is based on the English text of TAXP010; the Arabic text prevails. Specific advice should be obtained for each business.
