Distribution from a designated zone in the UAE. Case study

The facts

A distribution company (‘Distribution Co’) is incorporated in a free zone in the UAE. This zone is not included in the list of the designated zones. However, Distribution Co buys products and orders services from third parties to transport and store them in a UAE designated zone, and then distributes to the UAE mainland or abroad arranging delivery to the buyers (customers).

The question

Does this activity qualify for 0% Corporate Income Tax (CIT)?

The analysis

The MoF released the list of qualifying activities in its Decision No. 139/2023. Art. (2)(1)(k) of this Decision includes ‘distribution of goods or materials in or from a Designated Zone to a customer that resells such goods … or alters such goods … for the purposes of sale or resale’. Clause 2 of the same Article sets out that ‘the activity of distributing goods or materials must be undertaken in or from a Designated Zone and the goods or materials entering the State must be imported through the Designated Zone’.

The MoF launched a digital public consultation on its website as part of the UAE Corporate Tax’s Free Zone regulations. Para 3.11 of the Public Consultation Document (PCD) intends to introduce into the regulation a stipulation that ‘the Qualifying Activity of distributing goods or materials may include functions such as the importation, storage, inventory management, handling, transportation and exportation of those goods or materials’.

In our case, these activities are performed in the designated zone by contactors and providers operating in this zone. Distribution Co in a non-designated free zone supervises these activities of the providers that take place in the designated zone. The Cabinet in Article 7(2) of Decision No. 55/2023 sets forth that ‘activities can be outsourced to a Related Party in a Free Zone or a third party in a Free Zone, provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity’.

The conclusion

The analysis above allows us to deduce that current tax regulation doesn’t hinder a taxpayer from applying 0% CIT.

The assessment of risks

In the PCD, the MoF gives examples for the case of distribution with Distributor Co which is a ‘Designated Free Zone Person’. In both examples given, the Distributor Co itself is placed in the box of designated zone.

The concept of a ‘Designated Free Zone Person’ appeared in the PCD from nowhere. It is not mentioned either in the UAE Corporate Tax Law (CTL) or in Cabinet Decision No. 55 and MoF Decision No. 139/2023. They bind the 0% tax rate in with the status of a Qualified (not designated) Free Zone Person. In other words, they presuppose that a Qualified Free Zone Person should be in a position to apply 0% for its operations in or from a designated zone. However, the wording of the PCD exposes this position to risks of a different interpretation or a change in regulation.

Therefore, we need to follow updates on the outcome of the Digital Public Consultation, whatever it may be: an executive regulation, another decision of the Cabinet or a decision of the Minister of Finance.

The disclaimer

Pursuant to the MoFs press-release issued on 19tb May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.