Tax Public Clarification TAXP010: Free Zones and Designated Zones for Tax Purposes

TAXP010

Tax Public Clarification: Free Zones and Designated Zones for Tax Purposes

Issue

In certain instances, Businesses may be established in a Free Zone in the UAE. Businesses operating in a Free Zone may be subject to specific rules and treatment under the Tax Laws (Corporate Tax, Excise Tax, and Value Added Tax) applicable in the UAE.

There are differences in the definition of a Free Zone or a Designated Zone for Corporate Tax, Excise Tax, and Value Added Tax.

Businesses must determine if they are located in an area that qualifies as a Free Zone and/or Designated Zone for each Tax Law separately in order to be compliant with the relevant rules and regulations.

This Public Clarification provides guidance on what constitutes a Free Zone or a Designated Zone for each Tax Law, and key differences in the definitions between these Laws.

It is important to understand and identify what is a Free Zone and a Designated Zone to ensure compliance with the relevant Tax Law:

• Free Zone for Corporate Tax purposes (“Corporate Tax Free Zone”).
• Designated Zone for Corporate Tax purposes (“Corporate Tax Designated Zone”).
• Designated Zone for Excise Tax Purposes (“Excise Tax Designated Zone”).
• Designated Zone for VAT purposes (“VAT Designated Zone”).

In this Public Clarification, the List of Designated Zones for the purposes of the VAT Law, based on Cabinet Decision No. 59 of 2017 and its amendments is referred to as the “List of Designated Zones”.

Summary

Corporate Tax

A Corporate Tax Free Zone is a designated and defined geographic area within the UAE that is specified in a decision issued by the Cabinet at the suggestion of the Minister.

A Corporate Tax Designated Zone is a designated zone according to what is stated in the VAT Law (i.e. the “List of Designated Zones”), and which has been included as a Free Zone in accordance with the Corporate Tax Law.

All taxpayers should confirm with their respective Free Zone authority whether they are located in a Free Zone or Designated Zone for Corporate Tax purposes.

Excise Tax

An Excise Tax Designated Zone is a specific free zone or geographic areas that meets the conditions set out under the Excise Tax Law and Excise Tax Executive Regulation.

Businesses may confirm whether they are located in an Excise Tax Designated Zone by confirming with the Free Zone authority, or the Warehouse Keeper to confirm if the FTA has approved the specific area as an Excise Tax Designated Zone.

VAT

A VAT Designated Zone is a Free Zone that is listed in Cabinet Decision No. 59 of 2017 and its amendments that meets the conditions specified in Article 51(1) of the VAT Executive Regulation.

Businesses may confirm if they are located in a VAT Designated Zone by referring to the List of Designated Zones published by the FTA.

Detailed analysis

A Free Zone¹ offers Businesses¹ various benefits such as relaxed foreign ownership restrictions, streamlined administrative procedures, modern and sophisticated infrastructure, developed Business communities and the availability of additional legal entity forms and commercial activities.

A Free Zone is a designated and defined geographic area within the UAE that is specified in a decision issued by the Cabinet at the suggestion of the Minister.

Free Zone and Designated Zone for Corporate Tax Purposes

A Designated Zone² is 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.

It is important to note that a VAT Designated Zone is not automatically considered as a Designated Zone for Corporate Tax purposes. In order to be considered a Corporate Tax Designated Zone, the specific zone must be recognised as both, a VAT Designated Zone and a Free Zone for Corporate Tax purposes.

In order to determine if a Business operates in a Free Zone or a Designated Zone for Corporate Tax purposes, taxpayers should check with their respective Free Zone authority to confirm if they operate in a Free Zone or a Designated Zone for Corporate Tax purposes.

The Corporate Tax rules for Qualifying Free Zone Persons¹ allows juridical persons that are incorporated, established or otherwise registered in a Corporate Tax Free Zone to benefit from a 0% Corporate Tax rate on their Qualifying Income,³ provided that they meet the conditions prescribed under the Corporate Tax Law, Cabinet Decision No. 100 of 2023, Ministerial Decision No. 229 of 2025, any other conditions prescribed by the Minister.

A Qualifying Free Zone Person may derive Qualifying Income where, among others, such income is derived from transactions with another Free Zone Person⁴ that is the Beneficial Recipient⁵ of the transaction and does not relate to an Excluded Activity, or where the income is derived from a Qualifying Activity that is not an Excluded Activity.⁶

One of the Qualifying Activities² specified under Ministerial Decision No. 229 of 2025 is the “distribution of goods or materials in or from a Corporate Tax Designated Zone.”⁷ While all Qualifying Free Zone Persons are required to be incorporated/registered in and operate from a Free Zone, to fall under the Qualifying Activity of distribution, the Qualifying Free Zone Person should conduct the distribution activities in or from a Designated Zone.

Accordingly, a Qualifying Free Zone Person engaged in distribution activity may benefit from the 0% Corporate Tax rate on its Qualifying Income³ only where such distribution activities are carried out in or from a Corporate Tax Designated Zone, and all other conditions applicable to the distribution activity are satisfied, including any additional procedures prescribed by the FTA.^8,9

If a Qualifying Free Zone Person at any particular time during a Tax Period fails to meet any of the conditions set out in Article 18(1) of the Corporate Tax Law, Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025, and any other conditions prescribed by the Minister, that Person shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent four Tax Periods.¹⁰

Designated Zone for Excise Tax Purposes

An Excise Tax Designated Zone is defined in the Excise Tax Law as any fenced area established as a free zone that cannot be entered or exited except through a designated road, or any area designated by the FTA as being subject to the supervision of a Warehouse Keeper,¹¹ in accordance with the provisions of the Excise Tax Executive Regulation.

Conditions for an Excise Tax Designated Zone

In order for a Free zone to qualify as an Excise Tax Designated Zone, the Free zone must:

• Have security measures in place to restrict entry and exit of individuals and movement of Excise Goods to and from the fenced Free Zone according to the controls specified by the FTA.
• Be controlled and supervised by a customs department.
• Have a Warehouse Keeper appointed for the fenced Free Zone.¹²

To determine if they are located in an Excise Tax Designated Zone, Businesses must confirm with their Free Zone authority if the specific Free Zone in which they operate is considered an Excise Tax Designated Zone.

In order for any geographic area other than a Free Zone to be specified by the FTA to qualify as an Excise Tax Designated Zone, the following conditions must be met:

• The area is a specified geographic area.
• There are security measures in place to restrict entry and exit of individuals and movement of Excise Goods to and from that area, according to controls specified by the FTA.
• A Warehouse Keeper must be appointed for the area.

In order for a geographic area to qualify as an Excise Tax Designated Zone, the Warehouse Keeper must submit an application to the FTA to register the area as a Designated Zone.

Businesses must confirm with the Warehouse Keeper if the FTA has approved the specific area as an Excise Tax Designated Zone.

Designated Zone for VAT Purposes

A VAT Designated Zone¹³ is any specific fenced geographic area, specified in the List of Designated Zones, provided it meets the conditions prescribed under Article 51(1) of the VAT Executive Regulation.¹⁴

Conditions for a VAT Designated Zone

In order for a VAT Designated Zone to be considered as outside the UAE, the following conditions must be met:¹⁴

• The area is located in a specific fenced geographic area and must have security measures and customs controls in place to monitor entry and exit of individuals and movement of Goods to and from the area.
• The zone shall have internal procedures regarding the method of keeping, storing and processing of Goods therein.
• The operator of the zone complies with the procedures set by the FTA.

In order to determine if a company is located within a VAT Designated Zone, a company must review the List of VAT Designated Zones published by the FTA on its website, and confirm with the relevant free zone authority that the conditions provided in Article 51(1) of the VAT Executive Regulation are also met by the specific area of the VAT designated zone where the company is based.

For more information on Free Zones and Designated Zones, please refer to the relevant tax guides.

This Public Clarification issued by the FTA is meant to clarify certain aspects related to the implementation of Federal Decree-Law No. 7 of 2017 on Excise Tax and its amendments, Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments, Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business, and its amendments, Cabinet Decision No. 37 of 2017 on the Executive Regulation of Federal Decree-Law No 7 of 2017 on Excise Tax and its amendments, Cabinet Decision No. 52 of 2017 on the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments, Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, Ministerial Decision No. 84 of 2025 on Audited Financial Statements for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, and Ministerial Decision No. 229 of 2025 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

This Public Clarification states the position of the FTA and neither amends nor seeks to amend any provision of the aforementioned legislation. Therefore, it is effective as of the date of implementation of the relevant legislation, unless stated otherwise.

Legislative References:

In this clarification, Federal Decree-Law No. 7 of 2017 on Excise Tax and its amendments is referred to as “Excise Tax Law”, Federal Decree-Law No. 8 of 2017 on Value Added Tax and its amendments is referred to as “VAT Law”, Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Business and its amendments is referred to as “Corporate Tax Law”, Cabinet Decision No. 37 of 2017 on the Executive Regulation of Federal Decree-Law No 7 of 2017 on Excise Tax and its amendments is referred to as “Excise Tax Executive Regulation”, Cabinet Decision No. 52 of 2017 on the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax, and its amendments, is referred to as “VAT Executive Regulation”, Cabinet Decision No. 100 of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Cabinet Decision No. 100 of 2023”, Ministerial Decision No. 84 of 2025 on Audited Financial Statements for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 84 of 2025”, and Ministerial Decision No. 229 of 2025 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses is referred to as “Ministerial Decision No. 229 of 2025”.

1. Article 1 of the Corporate Tax Law defines the following terms as:
   • "Business” – Any activity conducted regularly, on an ongoing and independent basis by any Person and in any location, such as industrial, commercial, agricultural, vocational, professional, service or excavation activities or any other activity related to the use of tangible or intangible properties.
   • “Free Zone” – A designated and defined geographic area within the UAE that is specified in a decision issued by the Cabinet at the suggestion of the Minister.
   • “Free Zone Person” – A juridical Person incorporated, established or otherwise registered in a Free Zone, including a branch of a Non-Resident Person registered in a Free Zone.
   • “Qualifying Free Zone Person” – A Free Zone Person that meets the conditions of Article 18 of the Corporate Tax Law and is subject to Corporate Tax under Article 3(2) of the Corporate Tax Law.
2. Article 1 of Cabinet Decision No. 100 of 2023 defines the following terms as:
   • “Designated Zone” – 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.
   • “Qualifying Activities” – Any activities determined by a decision issued by the Minister and conducted by a Qualifying Free Zone Person from which Qualifying Income is derived.
3. Article 3(2)(a) of Corporate Tax law states that Corporate Tax shall be imposed on a Qualifying Free Zone Person at 0% (zero percent) on Qualifying Income.
4. Article 3(1)(a) of Cabinet Decision No. 100 of 2023 states that for the purposes of application of Article 18 of the Corporate Tax Law, Qualifying Income of the Qualifying Free Zone Person shall include income derived from transactions with a Free Zone Person, except for income derived from Excluded Activities, provided that such income is not attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment in accordance with Article 5 of the Decision, or derived from the ownership or exploitation of immovable property in accordance with Article 6 of the Decision, or considered Taxable Income under Article 7(2) of the Decision.
5. Article 3(3) of Cabinet Decision No. 100 of 2023 states that for the purposes of the Article, the term “Beneficial Recipient” shall mean a Person who has the right to use and enjoy the service or the Good and does not have a contractual or legal obligation to supply such service or Good to another person and the term “Good” shall mean tangible or intangible property that has economic value in dealing including movable and immovable property.
6. Article 3(1)(b) of Cabinet Decision No. 100 of 2023 states that for the purposes of application of Article 18 of the Corporate Tax Law, Qualifying Income of the Qualifying Free Zone Person shall include income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities, provided that such income is not attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment in accordance with Article 5 of the Decision, or derived from the ownership or exploitation of immovable property in accordance with Article 6 of the Decision, or considered Taxable Income under Article 7(2) of the Decision.
7. Article 2(1)(l) of Ministerial Decision No. 229 of 2025 states that for the purposes of Cabinet Decision No. 100 of 2023 referred to above, and subject to Clauses 2 and 3 of the Article, distribution of goods or materials in or from a Designated Zone conducted by a Qualifying Free Zone Person shall be considered a Qualifying Activity.
8. Article 2(3)(l) of Ministerial Decision No. 229 of 2025 states that distribution of goods or materials in or from a Designated Zone, includes the buying and selling of goods, materials, component parts or any other items that are tangible or movable and may include the importation, storage, inventory management, handling, transportation and exportation of such goods or materials or parts thereof, provided that such activities are conducted in or from a Designated Zone, and the goods or materials entering the State are imported through the Designated Zone, and the goods or materials are supplied to any of the following:
   1. A customer who resells, processes or alters such goods or materials, or parts thereof for the purposes of sale or resale.
   2. A public benefit entity.
9. Article 2(3) of Ministerial Decision No. 84 of 2025 states that, without prejudice to Clause 1 of the Article, a Qualifying Free Zone Person engaged in the activity of distribution of goods or materials in or from a Designated Zone in accordance with Ministerial Decision No. 265 of 2023 shall comply with any additional procedures prescribed by the FTA.
10. Article 5(2) of Ministerial Decision No. 229 of 2025 states that a Qualifying Free Zone Person that at any particular time during a Tax Period fails to meet any of the conditions set out in Article 18(1) of the Corporate Tax Law and the Decision and any other conditions prescribed by the Minister shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent four Tax Periods.
11. Article 1 of the Excise Tax Law defines “Warehouse Keeper” as any Person approved and registered at the Authority to supervise a Designated Zone in accordance with the provisions of the Executive Regulation of this Decree-Law.
12. Article 15(2) of the Excise Tax Executive Regulation states that, for the purposes of Article 13 of the Excise Tax Law, a “Designated Zone” is any of the following:
    • a. a fenced free zone that meets the following conditions:
      1. has security measures in place to restrict entry and exit of individuals and movement of Excise Goods to and from the fenced free zone according to the controls specified by the Authority,
      2. is controlled and supervised by a customs department, and
      3. a Warehouse Keeper has been appointed for the fenced free zone,
    • b. any area specified by the Authority provided it meets the following conditions:
      1. is a specific geographic area,
      2. has security measures in place to restrict entry and exit of individuals and movement of Excise Goods to and from that area, according to controls specified by the Authority, and
      3. a Warehouse Keeper has been appointed for the area.
13. Article 1 of the VAT Law defines “Designated Zone” as any area specified by a Cabinet Decision issued at the suggestion of the Minister, as a Designated Zone for the purpose of this Decree-Law.
14. Article 51(1) of the VAT Executive Regulation states that any Designated Zone specified by a decision of the Cabinet shall be treated as being outside the State and outside the Implementing States, subject to the following conditions:
    • a. The Designated Zone is a specific fenced geographic area and has security measures and Customs controls in place to monitor entry and exit of individuals and movement of goods to and from the area.
    • b. The Designated Zone shall have internal procedures regarding the method of keeping, storing and processing of Goods therein.
    • c. The operator of the Designated Zone complies with the procedures set by the Authority.