In Tax Public Clarification TAXP010, the Federal Tax Authority explains the differences between a Free Zone and a Designated Zone for Corporate Tax, VAT and Excise Tax purposes, and confirms that businesses must assess their location separately under each Tax Law.

Many businesses describe themselves as "free zone companies" because their licence was issued by a free zone authority. For tax purposes, that description is not enough. The Federal Tax Authority (FTA) has now published Tax Public Clarification TAXP010, which confirms that the concepts of Free Zone and Designated Zone are defined differently under the Corporate Tax Law, the VAT Law and the Excise Tax Law.

In practice, the same business may be in a Free Zone for Corporate Tax purposes but not in a Designated Zone for VAT purposes, or vice versa. Each position must be checked separately.

Follow-up to previous Altair Tax alert: this clarification is directly relevant to the qualifying distribution activity for Qualifying Free Zone Persons (QFZPs) covered in our Alert 1 on FTA Decision No. 6 of 2026.

Four concepts, not one

The clarification distinguishes between:

·        Corporate Tax Free Zone: a designated and defined geographic area within the UAE specified in a Cabinet Decision issued at the suggestion of the Minister.

·        Corporate Tax Designated Zone: a zone that is a Designated Zone under the VAT Law and has also been included as a Free Zone under the Corporate Tax Law.

·        VAT Designated Zone: a fenced zone listed in Cabinet Decision No. 59 of 2017, as amended, that also meets the conditions of Article 51(1) of the VAT Executive Regulation.

·        Excise Tax Designated Zone: a fenced free zone or other area that meets the conditions of the Excise Tax Executive Regulation, including the appointment of a Warehouse Keeper.

Why does this matter for Corporate Tax?

To be a QFZP and benefit from the 0% Corporate Tax rate on Qualifying Income, a juridical person must be incorporated, established or registered in a Corporate Tax Free Zone and meet all the other conditions.

The distinction becomes critical for distribution businesses. The Qualifying Activity of "distribution of goods or materials in or from a Designated Zone" under Ministerial Decision No. 229 of 2025 requires the activity to be carried out in or from a Corporate Tax Designated Zone. Being located in a Free Zone is not sufficient.

The FTA also confirms that a VAT Designated Zone is not automatically a Corporate Tax Designated Zone. To qualify, the zone must be both a VAT Designated Zone and a Free Zone for Corporate Tax purposes.

The consequences of getting this wrong can be significant. A QFZP that fails to meet any of the conditions at any time during a Tax Period ceases to be a QFZP from the beginning of that Tax Period and for the following four Tax Periods.

Why does this matter for VAT?

Supplies of goods within, or between, VAT Designated Zones may be treated as outside the UAE for VAT purposes, subject to the relevant conditions. However, appearing on the List of Designated Zones is not enough on its own.

The clarification states that a company should check the list published by the FTA and confirm with the free zone authority that the conditions of Article 51(1) of the VAT Executive Regulation are met by the specific area of the zone where the company is based. Those conditions include fencing, security measures and customs controls, internal procedures for keeping and processing goods, and compliance by the operator with the FTA's procedures.

This means that two companies licensed by the same free zone authority may not be in the same VAT position, depending on where within the zone they actually operate.

What about Excise Tax?

For Excise Tax, a Designated Zone is a fenced free zone that restricts the movement of individuals and Excise Goods, is supervised by a customs department and has an appointed Warehouse Keeper. The FTA may also approve other specific areas that meet similar conditions, following an application by the Warehouse Keeper.

Businesses dealing in Excise Goods should confirm their position with the free zone authority or the Warehouse Keeper.

What should businesses do now?

Free zone businesses, and groups with free zone entities, should consider:

·        Confirming in writing with their free zone authority whether they are located in a Free Zone and/or a Designated Zone for Corporate Tax purposes.

·        Checking whether the specific premises from which they operate meet the VAT Designated Zone conditions, not only whether the zone appears on the list.

·        For distribution businesses claiming the 0% rate, confirming that the activity is carried out in or from a Corporate Tax Designated Zone and that the goods flow meets the relevant conditions.

·        Reviewing the position when the business moves premises, opens a new warehouse or changes its operating model.

·        Keeping the confirmations obtained as part of the Corporate Tax and VAT file.

Altair Tax Insight

TAXP010 does not change the law. It is a Public Clarification that sets out the FTA's position and applies from the effective date of the relevant legislation. Its value lies in reminding businesses that "free zone" is a licensing concept, while Free Zone and Designated Zone are tax concepts with different meanings under each Tax Law.

In our experience, this is one of the areas where company set-up and tax analysis most often diverge. A licence obtained in a free zone does not, by itself, determine the Corporate Tax rate, the VAT treatment of supplies or the Excise Tax position. These should be reviewed at set-up and whenever the business model changes. The specific position of each business should be confirmed on a case-by-case basis.