Substance in a Designated Zone: Why a Warehouse Alone Doesn’t Qualify You for 0% Corporate Tax
If your business is operating in a UAE Free Zone, particularly a Designated Zone, you may be considering the 0% Corporate Tax rate available for certain Qualifying Activities. However, many companies mistakenly assume that simply having a warehouse in a Designated Zone is enough to meet the substance requirements set by the Federal Tax Authority (FTA).
This assumption can lead to non-compliance, unexpected tax liabilities, and the loss of Corporate Tax relief.
FTA Example: Warehouse Present, Substance Missing
According to the FTA’s published guidance:
A company structured as a Limited Liability Company (LLC) operates a warehouse in a Designated Zone.
However, its core income-generating activities (CIGA), such as order processing, sales strategy, and customer interaction, are conducted from a non-designated Free Zone.
The result:
The company does not meet the substance requirement for its distribution activity. Therefore, it fails to qualify for the 0% Corporate Tax rate on that income.
What Are Core Income-Generating Activities (CIGA)?
The UAE Corporate Tax framework defines substance in terms of CIGA, which refers to the actual business functions responsible for generating revenue. For distribution businesses, this typically includes:
Managing inventory and logistics
Fulfilling orders
Negotiating with clients
Overseeing supply chain operations
To benefit from Corporate Tax relief under the Qualifying Free Zone Person regime, these activities must be performed inside the Designated Zone, not just warehousing or storage.
Why a Warehouse Is Not Enough
While having a warehouse in a Designated Zone might appear sufficient at first glance, the FTA looks deeper. If the majority of your operations occur outside the Designated Zone, your business may be treated as a non-qualifying Free Zone Person, subject to the standard 9% Corporate Tax rate.
In short, substance must match structure.
Key Takeaways
Storage location alone does not determine tax eligibility.
Substance is based on where your real operations take place, including staffing, management, and decision-making.
To maintain the 0% rate, your distribution-related activities must be performed within the Designated Zone.
If you are not meeting these requirements, the FTA may deny your tax relief status.
Is Your Business at Risk?
Many companies unknowingly fall into non-compliance by focusing only on physical infrastructure and not operational substance. Before claiming the 0% Corporate Tax rate, it is critical to ensure that your operations, people, and decision-making functions are located in the correct zone.
Need Help Structuring Your Free Zone Entity?
At JetUp Tax & Business Consulting, we help Free Zone companies navigate UAE Corporate Tax requirements, assess substance compliance, and structure their operations to fully benefit from available tax reliefs.
If you’re unsure whether your business meets the substance requirements in a Designated Zone, our team is ready to assist.
Contact us today for a consultation and ensure your Free Zone business is compliant, optimized, and protected.
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