Note on Distribution of Goods

In the UAE Corporate Tax regime, a Qualifying Free Zone Person (QFZP) can benefit from the 0% rate on distribution income only where it is genuinely carrying on a principal distribution business from / in a Designated Zone and not merely acting as an agent or conduit for a nonFree Zone person, especially for transactions with mainland or other nonFree Zone customers.  

Qualifying distribution business as principal 

1. Definition of distribution as a Qualifying Activity 

• “Distribution of goods or materials in or from a Designated Zone” as a Qualifying Activity where carried on by a QFZP. 

• The FTA Guide clarifies that “distribution” involves: 

• purchasing goods (usually from manufacturers or other suppliers); 

• transporting and storing goods in a Designated Zone; and 

• selling those goods to persons who resell, process, or alter them for sale or resale.​ 

• Core incomegenerating activities for distribution must be carried out in a Designated Zone, not just any Free Zone (e.g. warehousing, inventory management, order processing, centralised sales / contracting). 

2. Substance and business model indicators of principal distribution 

To support Qualifying Income treatment, a Free Zone distributor should be able to demonstrate: 

• Risk and title - It takes legal title to goods and bears inventory, price and credit risks, as opposed to merely arranging supply on behalf of a mainland principal. 

• Core CIGAs in Designated Zone i.e. key functions, which includes purchasing, inventory / warehouse management, order acceptance, pricing decisions and contract conclusion – are undertaken in the Designated Zone by its own staff, or properly supervised Free Zone service providers. 

• Customer profile, sales are to B2B customers who resell or process goods, consistent with the Guide’s explanation of distribution; sales directly to “end users” for consumption may fall outside the intended Qualifying scope, unless the specific conditions in the Guide are met. 

• Contracts and documentation, Contracts with suppliers and customers name the Qulifying Free Zone entity as principal, with clear transfer of title and pricing; mainland customers deal with the Free Zone entity, not with another group company, for supply obligations. 

Where these features are present, income from such distribution to NonFree Zone Persons can be treated as Qualifying Income, subject to it being a Qualifying Activity and not falling within Excluded Activities or other carveouts (e.g. immovable property, nonQualifying IP). 

Agencytype or intermediary arrangements 

In an agency / commissionaire / buysell on account of mainland principal scenario, the Free Zone entity typically: 

• does not bear significant inventory or market risk; 

• is contractually obliged to transfer goods or services to a mainland principal or customers; and 

• earns a limited commission or service fee. 

In such cases, the Free Zone entity is more akin to an agent / conduit. 

Practical differentiation: principal vs agent for distribution 

From the legislation and FTA guidance, the following analytical tests are useful to classify each transaction / line of business: 

To substantiate that the Free (Designated) Zone entity acts as principal (and not as agent) in a distribution business, documentary evidence in the logistics and trade flow should consistently show it as the owner and seller of the goods. This evidence supports both the “distribution” Qualifying Activity and the functional/TP analysis expected by the FTA.​ 

Core documentary evidence 

For each supply chain / transaction line, aim for the Qualifying Free Zone entity (QFZP) to be clearly shown as principal in the following documents: 

      1.          Purchase side (from manufacturer / upstream supplier) 

      (a)   Purchase contract and purchase orders naming the Free Zone entity as buyer. 

      (b)   Commercial invoices issued to the Free Zone entity. 

      (c)    Bills of lading / airway bills (“consignee” and, where possible, “notify party”). 

      (d)   Import/customs declarations (where relevant) with the Free Zone entity as importer of record or owner of goods.​ 

2. Warehouse / Designated Zone level (if goods transfit in the designated zone) 

• Warehouse lease / service agreement in the Designated Zone in the name of the Free Zone entity, evidencing control over stock. 

• Stock records and warehouse receipts showing inventory held on own account, not on consignment for a mainland principal.​ 

3. Sales side (to NonFree Zone Persons) 

• Sales contracts and general terms & conditions naming the Free Zone entity as seller. 

• Sales invoices issued by the Free Zone entity, with appropriate Incoterms reflecting title/risk transfer from the Free Zone entity. 

• Outbound BL / AWB / delivery notes showing the Free Zone entity as shipper/exporter (or as seller where freight is arranged by customer).