Source: Fortis Consulting
Companies in the UAE that distribute goods within or from a designated free zone will soon receive clearer guidance on their corporate tax status.
The Federal Tax Authority (FTA) is preparing to issue controls that would allow distribution companies to confidently take advantage of the corporate tax exceptions included in the free zone regime.
New Guidance from the UAE Federal Tax Authority (FTA) onIy has issued new Guidance to help clarify corporate tax obligations for businesses operating in free zones, especially those engaged specifically in distribution activities. This is part of the UAE’s overall effort to establish an equitable and visible corporate tax system while keeping the country’s tax environment attractive.
Qualifying free zone businesses under the UAE’s corporate tax framework will benefit from a 0% corporate tax rate on qualifying income. To prevent abuse of this benefit and ensure that only deserving entities use it, the FTA However has outlined specific conditions that must be met—especially for distribution activities
“All tax groups will be required to prepare audited special purpose aggregated financial statements,” said the Ministry statement.
Current Requirements for Qualifying Free zone Business
One of the headline requirements is that the distribution activity should take place in or from a Designated Zone. These are specific free zones designated by the UAE Cabinet for VAT and corporate tax purposes like Jebel Ali Free Zone (JAFZA) and Khalifa Industrial Zone (KIZAD). Distribution, the sector of the economy related to the buying and selling of goods, must be within the area for it to qualify for the 0% rate.
The new guidance also highlights the importance of meeting economic substance requirements. Businesses have to show that they have sufficient physical presence in the Designated Zone, including premises, employees, and operational expenditures. This ensures that the free zone is not used merely as a legal address to gain tax benefits.
Furthermore, the revenue must qualify as qualifying income. Generally, income from transactions between other free zone entities (if both are Qualifying Free Zone Persons) will be eligible for 0% rate. Nevertheless, income regarding activities with mainland UAE clients or excluded activities may be at the normal 9% company tax.
The guidance includes permanent establishments as well. If a free zone company has a UAE mainland branch or equivalent, profits from that mainland establishment will cease to be eligible for the 0% rate and will be taxed at 9%. The latest update from the FTA encourages Free Zone businesses to assess the structure and activities they engage in to remain compliant and eligible for tax benefits. Tax advisors advise reviewing practices and contracts to ensure they meet revised criteria, since non-compliance may result in to losing tax-free status. Full details are available on the FTA’s website.
