UAE Free Zone Trading Companies: Understanding Corporate Tax on Distribution & Trading Activities
Trading companies in the UAE frequently engage in the cross-border movement of goods. The way corporate tax applies to free zone traders depends largely on the origin and destination of those goods, since this is linked to how the term “Distribution” is defined as a qualifying activity under UAE law.
Under the law, Distribution of goods or materials in or from a Designated Zone (DZ) refers to the purchase and sale of goods, raw materials, component parts, or any other tangible or movable items. It may also cover activities such as importation, storage, inventory management, handling, transportation, and re-export of those goods or materials. The scope further extends to transactions where the customer resells the goods (or parts of them) or carries out processing or alteration for the purpose of resale. However, these activities only qualify when they are carried out in or from a DZ, and the goods entering the UAE are brought in through that DZ.
Key Scenarios for Free Zone Traders
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Goods Imported into the UAE and Sold to Mainland Customers:
When a Free Zone (FZ) company imports goods from abroad and sells them to a mainland UAE customer, certain conditions must be met for 0% Free Zone
Corporate Tax:
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Physical passage requirement: Goods must physically pass through a DZ to qualify as “distribution” under the FZ tax rules.
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Direct shipment from overseas to a mainland buyer does not qualify as distribution income.
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To comply, goods should either:
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Be routed via a DZ, or
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Be stored in a DZ warehouse before delivery to the mainland customer.
FTA Guidance: The Federal Tax Authority’s Free Zone Guide clarifies this point, noting that: “the requirement for distributed goods to enter a DZ (Designated Zone) only applies to the distribution of foreign goods to customers located in the UAE outside a Designated Zone.” Where this condition is not fulfilled, such sales would normally be regarded as non-qualifying income, as the FZ itself is not actually part of the movement of goods.
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High-Seas or Direct Overseas Sales:
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When a FZ company purchases goods from a foreign supplier and sells directly to a customer in another foreign country or FZ, the transaction can qualify as a distribution activity under FZ Corporate Tax rules.
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This model is commonly referred to as a “high-sea sales model.”
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Goods do not need to physically enter mainland UAE if the commercial substance of the transaction is managed from the FZ.
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The resulting income may qualify as distribution income eligible for 0% tax, provided the following key functions are managed from the FZ:
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Negotiating and executing contracts
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Taking title and risk of the goods
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Controlling shipment arrangements
Example: A JAFZA based trading company buying machinery from China and delivering it directly to a distributor in Africa qualifies for 0% tax, as long as it acts as principal in the deal – assumes commercial risk and manages the trade from within the FZ.
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Purchasing from Mainland UAE and Exporting:
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FZ companies purchasing goods from a mainland supplier (e.g., a local manufacturer) and selling them to an overseas customer are treated as exports, and the income can still qualify for 0% tax.
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Goods do not need to physically pass through the FZ; the mainland supplier can ship directly to the foreign customer.
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The FZ entity must be the contracting party, arranging the transaction and holding title to the goods at the point of sale.
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This provides significant flexibility for FZ traders acting as intermediaries in marketing and exporting UAE-based products.
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Domestic B2B Trading (Free Zone to Mainland Business):
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When a FZ company sells goods from a mainland supplier to another mainland business (reseller), effectively acting as a distributor within the UAE market, the income may still qualify for 0% tax.
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Qualifying criteria:
FTA Guidance: The FTA guide explicitly confirms that “UAE made/located goods may be shipped directly to a UAE distributor/retailer without passing through a Designated Zone.”
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The FZ company must genuinely conduct distribution activity from the FZ, meeting substance requirements (e.g., premises and staff).
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The mainland buyer must not be the final consumer; they should be a reseller (e.g., distributor or retailer) for onward supply.
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Goods do not always need to pass through the FZ physically. Qualification is maintained as long as the FZ entity manages the trade, holds title, and executes contracts from within the zone.
Non-qualifying scenarios:
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If the mainland buyer is the end consumer, the income will not qualify.
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Simply raising invoices through an FZ without maintaining actual operations and oversight in the zone also does not meet requirements.
Example: A FZ distributor in Jebel Ali could arrange a sale in which a Dubai-based supplier ships directly to an Abu Dhabi retailer, while the ownership and commercial arrangements are handled from JAFZA.
End-User Test and KYC
A critical condition for any FZ trading company seeking to treat its income as qualifying “distribution” activity is that the buyer must not be the ultimate end-user of the goods. The term “end user” refers to the party that consumes or utilizes the product for its intended purpose, without any further resale, processing, or incorporation into other products for onward sale. To safeguard compliance, FZ traders are expected to:
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Carry out KYC checks or obtain written undertakings from their customers confirming that the goods are being acquired for resale, redistribution, or incorporation into other products for sale, rather than for self-consumption.
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Review their customer base and align contractual terms with the qualifying distribution model—for example, by including clauses that the buyer will either resell or export the goods. The FTA’s guidance expressly highlights this “end-user test” as a key compliance requirement for benefiting from the 0% FZ Corporate Tax regime.
Logistics Services vs. Trading
Some FZ companies engage in providing logistics services—such as storage, freight handling, and delivery—for goods they do not own. This is treated as a separate qualifying activity (“logistics services”), distinct from trading.
Where a trading company also offers such services, the income can qualify as well, provided the activities are primarily performed within the FZ. According to the FTA’s guidance, the fact that the final leg of delivery may occur outside the zone (for example, transporting goods to a customer’s premises in the UAE) does not disqualify the income, if the core logistics operations are centered in the FZ. This approach mirrors the trading rules: ancillary functions in the mainland are tolerated, but essential elements such as inventory storage, order processing, and fulfilment should remain Free Zone–based.
Furthermore, if certain activities are outsourced—for example, contracting a mainland transport company—the FZ entity must retain control and oversight over those outsourced services to ensure they are treated as part of its own operations.
Key rule: The FZ must retain substance and oversight for logistics-related profits to count as qualifying income.
Practical Tips for Free Zone Traders
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Structure Transactions Properly: Focus on exports, re-exports, or wholesale sales to resellers; avoid direct sales to end consumers.
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Maintain Substance: Have premises, staff, and control over contracts and inventory in the FZ.
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Document Customer Agreements: Ensure contracts include resale or export clauses.
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Perform KYC Checks: Confirm that buyers are not end-users.
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Monitor FZ Guidelines: Stay updated on FTA guidance to ensure continued eligibility for 0% tax.
UAE FZ trading companies have the potential to unlock 0% corporate tax benefits with the right structuring. By focusing on exports, reseller sales, and maintaining strong FZ substance, businesses can optimize tax savings while staying compliant. Reach out to us at info@akmglobal.in to know more about how we can support your tax and compliance needs.