The UAE’s business-friendly environment is boosted by over 45 free zones across the country, providing businesses with complete foreign ownership, tax advantages, and streamlined operations. These free zones are a critical part of the UAE’s strategic positioning as a global hub for trade, logistics, finance, and innovation
Among the various free zones, Designated Free Zones (DFZs) offer unique legal advantages for businesses, especially when it comes to VAT and corporate tax regulations. 
What are Designated Free Zones (DFZs)?
Designated Free Zones are areas that have a unique VAT status, allowing businesses to operate as though they are outside the UAE for VAT purposes. These zones benefit from a 0% VAT rate on the movement of goods within them, provided certain criteria are met. However, services within DFZs still remain subject to the standard 5% VAT rate.
Key Criteria for DFZs: To qualify as a DFZ, the zone must meet four specific requirements:
- Clearly defined geographic area with controlled access points.
- Robust security measures and customs controls.
- Formal procedures for storing, processing, and tracking goods.
- Compliance with the Federal Tax Authority’s (FTA) regulations and reporting requirements.
When these criteria are met, businesses operating within a DFZ may benefit from VAT exemptions for specific goods. However, it’s important to note that some supplies, such as energy and water goods for consumption, remain subject to VAT.
Intra-Zone and Cross-Border VAT Treatment
While goods transferred within a DFZ may qualify for 0% VAT, goods moving from mainland UAE into a DFZ are considered taxable supplies at the standard VAT rate. This distinction makes it critical for businesses to understand the VAT treatment in specific scenarios to avoid costly miscalculations.
Advantages for Businesses in DFZs
Designated Free Zones offer significant corporate tax benefits for businesses, especially for traders, distributors, and manufacturing units. These zones provide a streamlined regulatory environment conducive to international trade, making them ideal for businesses that rely on cross-border transactions and bulk goods movement.
DFZ vs Non-Designated Free Zones: A Comparison
While non-designated free zones also offer benefits like 100% foreign ownership and customs duty exemptions, they do not enjoy the VAT exemptions provided to DFZs. These zones may be more suited for service providers or smaller businesses targeting the UAE domestic market, where the regulatory environment is simpler.
Corporate Tax Considerations
UAE corporate tax laws generally offer a 0% rate for businesses in both designated and non-designated free zones. However, for distribution activities, businesses must be located within a DFZ for the income to qualify for the 0% tax rate.
The Ministerial Decision No. (265) of 2023 further clarifies that the distribution of goods must occur within or from a DFZ for tax exemptions to apply. This includes the entire supply chain, from importation to export.
Conclusion: Choosing the Right Free Zone
Choosing between designated and non-designated free zones depends on the nature of the business. DFZs, typically located near major ports and logistics hubs, are ideal for businesses engaged in international trade and distribution. On the other hand, non-designated zones are often better for businesses focused on services and targeting the UAE domestic market.
Before establishing operations, businesses need to confirm the current status of their chosen free zone, as the list of approved DFZs is updated regularly.
