Free Zone vs Designated Zone in the UAE: Corporate Tax, VAT and Excise Explained
A free zone licence does not tell you how VAT, Corporate Tax or Excise Tax treat your company. Each law has its own definition, and the FTA’s public clarification TAXP010 says you have to check your status under each one separately. Here is what each term means and how to check.
“We are in a free zone, so we don’t charge VAT” is a mistake we often hear from new UAE companies. It mixes up two different statuses. A free zone is where your company is licensed. A designated zone is a narrower status that matters mainly for VAT and Excise Tax, and it applies only to some fenced areas inside some free zones.
In October 2026 the FTA put the definitions side by side in public clarification TAXP010, Free Zones and Designated Zones for Tax Purposes. This guide follows it: what each term means under each tax, which zones are on the VAT list, how goods and services are taxed inside a designated zone, and the steps to confirm your own status.
Free zones and designated zones at a glance
| Status | Which tax | What it is | How to check |
|---|---|---|---|
| Free Zone | Corporate Tax | An area named in a Cabinet decision issued at the Minister’s suggestion | Your free zone authority |
| Designated Zone | Corporate Tax | A zone on the VAT list of designated zones that is also a Corporate Tax free zone | Your free zone authority |
| VAT Designated Zone | VAT | A free zone on the FTA’s List of Designated Zones whose area meets Article 51(1) of the VAT Executive Regulation | The FTA list, then your free zone authority |
| Excise Tax Designated Zone | Excise Tax | A fenced, customs-supervised free zone with a warehouse keeper, or another area the FTA approves | Your free zone authority or the warehouse keeper |
The same company can sit in a free zone for Corporate Tax and still be treated as a mainland business for VAT. That is the normal position for most service companies.
What counts as a free zone for Corporate Tax?
Under the Corporate Tax law, a free zone is a designated and defined geographic area within the UAE that a Cabinet decision names, at the suggestion of the Minister of Finance. A company incorporated or registered there is a Free Zone Person.
Being a Free Zone Person does not by itself mean 0% tax. A company has to meet the conditions for a Qualifying Free Zone Person: adequate substance, qualifying income, transfer-pricing compliance, audited financial statements and the other conditions in the law, Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 229 of 2025. Our guide to the Qualifying Free Zone Person regime covers them in full.
If a Qualifying Free Zone Person fails any condition at any time during a tax period, it loses the status from the start of that period and for the following four tax periods.
What is a designated zone for Corporate Tax?
For Corporate Tax, a designated zone is a zone that appears on the VAT list of designated zones and is also a free zone under the Corporate Tax law. Both conditions have to hold. TAXP010 states that a VAT designated zone is not automatically a designated zone for Corporate Tax.
The status matters for one qualifying activity in particular: the distribution of goods or materials in or from a designated zone. Under Ministerial Decision No. 229 of 2025, this covers buying and selling goods, materials and parts, and can include import, storage, inventory management, handling, transport and export. It qualifies only when:
- the activity is carried out in or from a designated zone;
- goods entering the UAE are imported through the designated zone; and
- the goods are supplied to a customer who resells or processes them for sale, or to a public benefit entity.
A distributor that operates from a free zone that is not a Corporate Tax designated zone cannot rely on this activity for its 0% rate. A Qualifying Free Zone Person that does rely on it also has to follow the extra procedures the FTA prescribes, including an agreed-upon procedures report from an independent auditor. TAXP010 tells every taxpayer to confirm with its free zone authority whether it sits in a free zone or a designated zone for Corporate Tax.
What is a designated zone for VAT?
For VAT, a designated zone is an area named by Cabinet decision. The current list is the FTA’s List of Designated Zones, based on Cabinet Decision No. 59 of 2017 and its amendments. A listed zone is treated as outside the UAE for VAT on goods only where the specific area meets three conditions in Article 51(1) of the VAT Executive Regulation:
- It is a specific fenced geographic area with security measures and customs controls on people and goods entering and leaving.
- It has internal procedures for keeping, storing and processing goods.
- Its operator complies with the procedures the FTA sets.
The list currently names 24 zones: five in Abu Dhabi, seven in Dubai, two in Sharjah, one in Ajman, two in Umm Al Quwain, five in Ras Al Khaimah and two in Fujairah. They include Jebel Ali Free Zone (North and South), Dubai Airport Free Zone, Dubai CommerCity, Khalifa Industrial Zone, Hamriyah Free Zone, Sharjah Airport International Free Zone, Ajman Free Zone, RAK Port Free Zone and Fujairah Free Zone.
Three zones have been removed and are treated as mainland from the date of removal: RAK Airport Free Zone from 4 July 2019, Dubai Textile City from 4 April 2021, and the Free Zone Area in Al Quoz from 1 July 2021.
Many of the free zones where service companies register are not on the list at all, including DMCC, IFZA and Meydan. For VAT, a company licensed there is in the same position as a mainland company: it registers once its taxable supplies pass AED 375,000, charges 5% on standard-rated supplies and recovers input VAT in the normal way.
A zone on the list is still not a blanket answer. TAXP010 asks a company to check the list and then confirm with its free zone authority that the area where it is actually based meets the Article 51(1) conditions.
How VAT applies inside a VAT designated zone
The special treatment covers goods only.
A supply of goods within a designated zone is outside the scope of UAE VAT when the goods are not consumed there, for example when they are held for resale. Moving goods from one designated zone to another under customs suspension, without using or changing them, is also outside the scope. Goods brought from abroad into a designated zone are not treated as imported into the UAE.
When goods are supplied inside a designated zone for consumption, including use by the buyer itself, the place of supply is the UAE and 5% VAT applies. There are three exceptions: the goods are built into other goods in the same zone that are not consumed there, they are exported with evidence, or they are brought into the mainland with official proof that import VAT was paid. If the owner consumes goods on which no VAT was paid, or they go missing, that counts as an import into the UAE.
A service whose place of supply is in a designated zone is treated as supplied in the UAE and taxed under the usual rules, normally at 5%. Businesses in a designated zone are treated as UAE residents for VAT. A consultancy, agency or software company in Jebel Ali charges VAT on its services exactly as it would on the mainland.
Breaking the conditions for keeping goods in a designated zone, or for moving them to another designated zone, carries a penalty of AED 50,000 or 50% of the tax on those goods, whichever is higher.
What about Excise Tax?
Excise Tax has its own designated zones, and they are approved by the FTA rather than listed by Cabinet decision. A free zone qualifies when it is fenced with security measures controlling people and excise goods, is supervised by a customs department, and has a warehouse keeper appointed for it. The FTA can also approve another specific geographic area that has security controls and a warehouse keeper. The warehouse keeper applies to the FTA to register the area.
Excise goods brought straight into an excise designated zone are not treated as imported, and goods stored or processed there are not released for consumption until they leave. Excise tax becomes due when they are released. Only businesses that import, produce or store excise goods such as tobacco, energy drinks or sweetened drinks need to look at this status. To confirm it, ask your free zone authority or the warehouse keeper whether the FTA has approved the area.
Mistakes we see most often
- Treating a free zone licence as a VAT exemption. Most free zone service companies charge and recover VAT like any mainland company.
- Assuming the VAT list settles Corporate Tax. A zone on the VAT list is a Corporate Tax designated zone only if it is also a Corporate Tax free zone.
- Checking only the zone name. The Article 51(1) conditions apply to the specific area where you operate, which is why TAXP010 asks you to confirm with the free zone authority.
- Relying on an old list. Three zones were removed between 2019 and 2021, and the list can change again by Cabinet decision.
- Forgetting that services are taxed. Inside a designated zone they are still standard-rated.
How to check your company’s status
- Find your zone on the FTA’s List of Designated Zones. If it is not there, standard VAT rules apply.
- If it is listed, ask your free zone authority in writing whether the area where you operate meets the Article 51(1) conditions, and keep the answer.
- Ask the same authority whether your zone is a free zone and a designated zone for Corporate Tax. Distributors claiming the 0% rate need both answers.
- If you deal in excise goods, confirm with the free zone authority or the warehouse keeper that the FTA has approved the area as an excise designated zone.
- Review your invoices and VAT return treatment against the answers, especially supplies of goods inside the zone.
Still choosing where to open your company? Our comparison of free zone and mainland companies covers the licensing side of the decision.
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This material is for reference and is not tax advice. Sources: FTA public clarification TAXP010, the FTA’s List of Designated Zones, the VAT Executive Regulation (Cabinet Decision No. 52 of 2017, Article 51) and Ministerial Decision No. 229 of 2025. Always verify current requirements with the FTA and your free zone authority.
What this means for you
Your free zone licence does not answer the tax question on its own. Keep three things straight:
Check each tax separately
Corporate Tax, VAT and Excise Tax each define free zones and designated zones differently. FTA clarification TAXP010 asks every company to confirm its status under each law on its own.
Most free zones are mainland for VAT
Only 24 zones are on the FTA List of Designated Zones, and only areas meeting Article 51(1) count. A company elsewhere charges and recovers VAT like a mainland business.
Inside a designated zone, only goods are special
Goods not consumed in the zone can fall outside UAE VAT. Services are always taxed under the normal rules, usually at 5%.
Frequently asked questions
Do free zone companies in the UAE charge VAT?
Yes, in most cases. A company in a free zone that is not on the FTA List of Designated Zones is treated like a mainland company for VAT: it registers once taxable supplies pass AED 375,000 and charges 5% on standard-rated supplies. Services are taxed normally even inside a designated zone.
Is DMCC, IFZA or Meydan a designated zone?
None of them appears on the FTA List of Designated Zones, so for VAT a company licensed there is in the same position as a mainland company. They can still be free zones for Corporate Tax, which is a separate question to confirm with the free zone authority.
Is every VAT designated zone also a designated zone for Corporate Tax?
No. According to FTA clarification TAXP010, a zone counts as a Corporate Tax designated zone only if it is on the VAT list of designated zones and is also a free zone under the Corporate Tax law. Distributors relying on the 0% rate for distribution in or from a designated zone need both conditions.
How do I confirm my company is in a VAT designated zone?
Check the FTA List of Designated Zones first. If your zone is listed, ask your free zone authority to confirm in writing that the specific area where you operate meets the conditions of Article 51(1) of the VAT Executive Regulation: fenced, under customs control, with internal procedures for goods and an operator that follows FTA procedures.
