Digital Public Consultation related to UAE Corporate Tax in Free Zones

PGP Tax Consultancy advises that the Ministry of Finance is launching a Digital Public Consultation for Free Zone Companies. Responses should be submitted through the form by no later than 2 August 2023.

Although the Consultation Paper is being issued for the sole purpose of obtaining input from interested parties and does not constitute the final legislative position, the paper gives several interesting illustrations for the purpose of applying Ministerial Decision No. 139 of 2023 regarding Qualifying Activities and Excluded Activities.

We would like to draw attention to the following illustrations.

1. Distribution of goods or materials (par. “k”, Art. 2(1) of Decision No. 139)


The distribution of goods or materials includes the buying and selling of products, materials, component parts or any other items that are tangible or movable in or from a Designated Zone.

The Ministry of Finance (“MoF”) provides two illustrations of a Qualifying Activity.

The first illustration is obvious since goods are imported from the Designated Zone into the UAE mainland. The illustration complies with the Art. 2(3) of Ministerial Decision No. 139, in which it is stipulated that “the activity of distributing goods or materials must be undertaken in or from a Designated Zone and the goods or materials entering the State must be imported through the Designated Zone”.

UAE Ministry of Finance Corporate Tax Consultation Paper

The second illustration demonstrates a broader approach of the MoF to the interpretation of distribution in or from a Designated Zone.

UAE Ministry of Finance Corporate Tax Consultation Paper

The MoF has already announced this broad approach in its Public Awareness Session on the “Free Zone Corporate Tax regime”. However, now this interpretation of the MoF is demonstrated in a Consultation Paper.



We recommend that Free Zone trading companies should monitor whether this approach will be reflected in the final legislation or guidance.


We recommend that Free Zone trading companies should monitor whether this approach will be reflected in the final legislation or guidance.


2. Manufacturing of goods or materials (par. “a”, Art. 2(1))


The big news in the Consultation Paper is the interpretation of “Manufacturing”.

The MoF is proposing:


  1. to distinguish full-fledged manufacturing from contractual manufacturing,

  2. to tax the whole profit of a contractual manufacturer at 0%;

  3. to split the profit of a full-fledged manufacturer into 2 parts:


  • profit from manufacturing, which is subject to a 0% tax rate, and
  • profit from sale (distribution), which may be taxed with a 0% rate only if this sale is made from a designated zone for subsequent sale of the same or processed products.


Decision No. 139, which introduced Qualifying Activity for a zero rating, has not given rise to such an interpretation. The ‘Manufacturing of goods or materials’ and ‘Processing of goods or materials’ both qualify for a 0% Corporate Tax rate but under separate paragraphs.

The issues raised by this approach are described in detail in the material by Andrey Nikonov, a Partner at PGP Tax Consultancy.

Most obvious is what method is to be used to allocate the profit of a fully-fledged manufacturer between manufacturing and distribution.

What functions shall be treated as manufacturing features and which are the attributes of distribution activity? Where a distributor and fully-fledged manufacture are different persons, a great number of functions may be allocated between them according to the contract. But there is no contract within a single entity which manufactures a product and sells it.

In the material mentioned above, we are trying to give some clues.

Is it worth singling out the sales department and relocating it from a regular free zone to the designated one? What form will be better used for such separation: a branch or separate entity? Which positions and assets should be relocated? How to proceed with all these and prevent GAARLocal anti-abuse regulation
 and PPTThe Principal Purpose Test from international double tax treaties
 claims, which both negate tax driven arrangements? We think these questions may be put on hold for a while. The Ministry of Finance is giving us a chance not only to obtain more clarity in the forthcoming regulation but also to affect the approach itself.

This is where we should focus now. The consultation is open from 19th July to 2nd August 2023. The Public Consultation Document (PCD) “aims to gather feedback from free zone-based companies and other relevant parties before issuing further clarifications or executive decisions detailing the scope of these activities. The Ministry of Finance welcomes clear and concise comments, with examples and data (where possible) or other information to support the views expressed in the responses to this consultation. The responses must be received by 2nd August 2023 and will remain confidential, and will not be published”.


Therefore, we advise you:

  • to ensure that you are prepared for the Public Consultation by reading this alert and the material in this link;

  • to take part in the digital public consultation and comment according to your best interests using this link.


3. Ownership or exploitation of intellectual property (IP) assets (par. “f”, Article 3(1))


The MoF also provides explanations and illustrations of Excluded Activities. One Excluded Activity is the ownership or exploitation of IP assets.

The PCD supports concept of separately identifiable income from intellectual property assets.

Income derived from the use of IP assets that is used in or otherwise contributes to a product or service for which no separate remuneration is received should generally not generate income from the ownership or exploitation of intellectual property assets for the purposes of the Free Zone CT regime.

One illustration is when a manufacturer in a free zone produces and sells branded goods to its customers. The value of the branded goods includes ‘embedded IP’ but no separately identifiable income from IP assets is earned in this scenario.

This approach is in line with the Economic Substance Regulations. Thus, this clarification from the Relevant Activities Guide equally affects ESR and tax issues: “If there is any indication that a Licensee has manipulated its gross income to avoid being subject to the economic substance requirements as an Intellectual Property Business…, the Regulatory Authority shall take the necessary action to ensure compliance with the ESR Regulations”.

The Authorities refuse to offer any clarification on ESR, urging companies “to seek professional advice”. Thus, taking part in the digital public consultation is a unique chance to have controversial issues clarified. Shall SAAS, IaaS, PaaS and SaaS be treated as IP business (excluded activity for a 0% tax rate)? This is one of such issue. A more general one is how to determine the demarcation line which, when crossed, turns exploitation of IP assets in other businesses into a fully-fledged IP business.     

What to do?


The Ministry of Finance is working on the rules of the Corporate Tax regime for Free Zone Persons. We recommend not only monitoring the issuing of new clarifications by the MoF, but also actively participating in the development of these rules by asking questions and sharing concerns as part of the Digital Public Consultation.

Help from your adviser


PGP Tax Consultancy can analyze the types of activities conducted by your business from the perspective of whether such activity is classified as Qualifying or Excluded, as well as help your business to articulate questions and suggestions to participate in the Digital Public Consultation.


Maria Nikonova
Head of PGP Tax Consultancy in the UAE, PhD in Law

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