Distribution activities are recognised as a Qualifying Activity under UAE Corporate Tax regulations. The rules governing Qualifying Activities in UAE Free Zones set out detailed conditions for distribution. Many global organisations are attracted to UAE Free Zones, particularly Designated Zones, for the 0% Corporate Tax rate available on Qualifying Income. With the implementation of corporate tax in the UAE, businesses are keen to leverage this advantage, particularly for the distribution of goods.
Prominence of Trading and Distribution Companies
Trading and distribution companies are particularly prominent in the UAE’s Free Zones, including Designated Zones. Under Ministerial Decision No. 229 of 2025, businesses engaged in distribution of goods or materials in or from a Designated Zone must meet specific conditions to have that income treated as Qualifying Income.
Interpretation and Challenges
Observations of several Free Zone companies reveal that many believe the distribution activities eligible for the preferential tax rate are limited to transactions with resellers. Consequently, companies involved in B2B sales, such as selling capital equipment to infrastructure firms or spare parts to vehicle leasing companies, might not benefit from the zero percent tax rate. This interpretation raises important questions about the strictness of this definition, particularly where the customer’s use of the goods isn’t always clear at the point of sale.
Distribution Among the UAE’s Qualifying Activities
Distribution of goods or materials in or from a Designated Zone is one of the Qualifying Activities recognised under Ministerial Decision No. 229 of 2025. The full list of recognised Qualifying Activities includes:
- Manufacturing of goods or materials.
- Processing of goods or materials.
- Trading of Qualifying Commodities.
- Holding shares and other securities for investment purposes.
- Ownership, management, and operation of ships.
- Reinsurance services.
- Fund management services.
- Wealth and investment management services.
- Headquarters services provided to Related Parties.
- Treasury and financing services provided to Related Parties or conducted for the company’s own account.
- Financing and leasing of aircraft.
- Distribution of goods or materials in or from a Designated Zone.
- Logistics services.
- Activities that are genuinely ancillary to a Qualifying Activity.
Read More: Guide to Qualifying Income in UAE Free Zones
Key Aspects of Qualifying Distribution Activity Under Corporate Tax UAE
- Ownership: A distributor must take title of the goods being distributed, carrying the inventory on its own balance sheet and bearing the risk if the goods don’t sell.
- Scope of Activities: Distribution covers acquiring, marketing, and supplying goods; holding, stocking, and ordering; moving goods in and out; and exporting and shipping products or materials.
- Geographical Requirement: Distribution activities must take place in or from a Designated Zone.
Exclusions from Distribution
Distribution excludes intangible goods and services, licences, software, and financial products and services. However, a physical product that contains embedded software or firmware is still treated as a tangible product for this purpose.
Distribution vs. Logistics Services
- Distribution: The distributor purchases goods and resells them, taking ownership of the inventory.
- Logistics Services: Concerned with moving, positioning, and storing goods without taking ownership of them.
End User Consideration
Goods should be supplied to customers who resell them, or who process or alter them for resale, rather than to the final consumer.
Qualifying Activities in Distribution
- Purchase and Resale: Buying products from manufacturers at wholesale rates and selling them to retailers at a markup.
- Warehousing: Storing purchased goods until they are ready for delivery.
- Transportation and Logistics: Scheduling transport routes, preparing shipment documentation, and delivering goods on time.
- Inventory Management: Controlling stock levels and sales orders to avoid stockouts or overstocking.
- Order Processing: Taking, processing, and fulfilling sales orders for transfer to retailers or customers.
- Packaging and Repackaging: Branding, labelling, warranty information, and packaging enhancements.
Ancillary Activities
The following ancillary activities integrally and naturally complement qualifying distribution activities, subject to the applicable conditions being met:
- Marketing and Advertising: Promotional activity intended to increase sales volumes.
- Quality Control and Inspection: Inspecting goods before distribution to confirm they haven’t spoiled or been damaged.
- Customer Support Services: Handling customer inquiries, complaints, and feedback.
Examples of Distribution Activities
- High Sea Sale or Third-Port Trading: Company C, a Free Zone Person formed in a Designated Zone, imports goods produced in Country A for sale to a retailer in Country B. Company C undertakes a Qualifying Activity because the goods are transshipped in or from the Designated Zone and never enter the UAE.
- Export from the UAE: Company E, a Free Zone Person in a Designated Zone, imports goods from a UAE juridical person and exports them to a retailer outside the country. Company E undertakes a Qualifying Activity because its operations take place in or from the Designated Zone.
- Domestic Procurement and Sale: Company F, a Free Zone Person in a Designated Zone, buys goods from UAE juridical persons and sells them to retailers, with goods moving directly from the manufacturer to the retailer via the Designated Zone. Company F undertakes a Qualifying Activity even though the goods originated in the UAE.
Read More: Transfer Pricing According to the New Corporate Tax Law
Non-Qualifying Activities
- Sales Agents or Consultants: Helping to sell or buy goods without taking ownership of them is not a Qualifying Activity.
- Distributor Example: Company D, a Free Zone Person, buys books from a publisher and sells them to bookstores while owning the title and managing transportation. Company D undertakes a Qualifying Activity.
- Sales Agent Example: Company S, a Free Zone Person, sells books to bookstores on behalf of a publisher on commission, without ever owning the books. Company S does not undertake a Qualifying Activity, as it never holds title to the goods.
Practical Challenges Distribution Companies Have Faced
Since corporate tax in the UAE is a direct tax, questions have long persisted around how a distributor demonstrates that its customers are genuine resellers, particularly with international customers outside the distributor’s control, and what documentation should support that position. The FTA has since addressed much of this uncertainty directly, as set out below.
Agreed-Upon Procedures Requirement for Distribution QFZPs (FTA Decision No. 6 of 2026)
FTA Decision No. 6 of 2026, effective for Tax Periods starting on or after 1 January 2026, introduced an additional compliance step specifically for Qualifying Free Zone Persons engaged in the distribution of goods or materials in or from a Designated Zone.
A distribution QFZP must now obtain an Agreed-Upon Procedures (AUP) report from an independent external auditor, prepared under International Standard on Related Services (ISRS) 4400. The auditor can be the same firm responsible for the QFZP’s annual financial statement audit, or any other licensed auditor in the UAE.
The AUP report must demonstrate two things:
- That the QFZP’s customers genuinely resell the goods or materials supplied, or process or alter them for resale, rather than consuming them as end users.
- That any goods or materials imported by the QFZP entered the UAE through a Designated Zone.
To support these findings, the QFZP must collect and retain documentation such as customer trade licences, signed customer declarations confirming the goods are acquired for resale, sales agreements and invoices, and import records including customs declarations and bills of lading. The auditor tests a sample of this documentation, sized using a prescribed formula with a 10% margin of error and weighted toward the highest-value customers, sales agreements, or imports in the Tax Period.
The AUP report must be submitted to the FTA no later than 30 days after the deadline to file the Corporate Tax return for the relevant Tax Period. This requirement only applies to Tax Periods starting on or after 1 January 2026. A calendar year Tax Period ending 31 December 2025 falls outside it, since that period started before the cutoff. For a calendar year Tax Period running from 1 January 2026 to 31 December 2026, the Corporate Tax filing deadline is 30 September 2027, which puts the AUP report deadline at around 30 October 2027.
If the AUP report isn’t submitted on time, the FTA treats the qualifying conditions for the distribution activity as not met. The income from that activity is then taxed at 9% instead of 0%, and if this pushes the QFZP’s total non-qualifying revenue above the de minimis threshold, the QFZP can lose its status entirely for that Tax Period and the following four Tax Periods.
