Trading vs Distribution under MD 229: rethinking the 51% Limitation for Qualifying Commodity traders

Working assumption

For the purpose of this article, we adopt an explicit working assumption. We assume a mainstream interpretation that the 51% limitation applies to the entire “Trading of Qualifying Commodities” activity (physical trading, associated hedging and associated SCF) and not only to the SCF component.

This is consistent with how the technical summaries describe the rule.

Deloitte, for example, notes that if a QFZP earns 51% or more of its revenue from distribution, warehousing, logistics or inventory management, then “their trading of commodities, associated derivatives or financing transactions will not be considered trading of qualifying commodities”, treating the guardrail as applying to the full trading/derivatives/SCF cluster rather than SCF in isolation.[1]

NR Doshi (practical guide) also states: “If revenue from distribution, warehousing, logistics or inventory management ≥ 51% of total revenue in the tax period, the entity is treated as a distributor, and commodity trading status is lost”.

Once that assumption is made, two threshold questions arise that are crucial for commodity traders and their advisers.

Two threshold questions

The first question is conceptual: what does it mean to be “distribution” within a trading business? MD 229 uses the phrase “distribution, warehousing, logistics or inventory-management functions” as a filter for commodity traders. It presupposes that, within a trading business, one can identify a part of its revenue that genuinely reflects distribution or logistics functions, as opposed to pure trading. The decision itself, however, does not set out where that line runs. If not every movement or storage of goods is “distribution”, then a workable distinction is needed between trading revenue and distribution / warehousing / logistics / inventory-management (“W/L/IM”) revenue.

The second question is structural: if trading is the broader commercial activity, and distribution is only one possible component within it, how should a QFZP organize and qualify its activities for the 0% rate? Or, put differently: does the 51% limitation implicitly push us towards treating distribution as a subset or “mode” of trading, and hence towards a model where the same legal entity must segregate its activity into

• distribution/WLIM functions and
• trading functions, and qualify only the latter under “Trading of Qualifying Commodities”, to the extent the subject of trading is a Qualifying Commodity?

If we accept that framing, we must recognize two scenarios.

First, there can be trading of Qualifying Commodities without any meaningful distribution function: a trader whose value creation lies in price- and risk-based intermediation, and for whom distribution function is either absent or incidental and not a profit center.[1]

Second, there can be trading of Qualifying Commodities that includes a distribution component: for example, a trader running a Designated Zone hub, holding inventory for customers and managing deliveries. In that case, it is natural to ask whether the entity must economically segregate its revenue and functions, so that only the trading limb (and only where it concerns Qualifying Commodities) is treated as falling under the Trading of Qualifying Commodities category, while the distribution limb is either analyzed under the separate Distribution or Logistic category or treated as non-qualifying.

In this article, we describe a potential interpretation of these new rules. Under this construction, Article 2(3)(c) of MD 229 presupposes a conceptual distinction between trading and distribution:

• distribution may be one component within a broader trading model, but
• distribution is not the same as trading.

Within the Trading of Qualifying Commodities framework, the 51% threshold then operates as a qualifier of the activity:

• Where a trading business is heavily loaded with a distribution component, the effect of the threshold is to push that business towards the distribution category. To obtain the 0% rate such trading would need to satisfy the conditions for Distribution of goods or materials in or from a Designated Zone (including the requirement that goods should be sold for resale).
• Conversely, where trading is not characterized by a substantial distribution component, the activity should be viewed as falling within Trading of Qualifying Commodities. Whether this activity is conducted in or from a Designated Zone will not be the decisive factor. In that case, the decisive criterion becomes whether the goods themselves meet the definition of “Qualifying Commodities”. If they do not, the activity is a candidate for disqualification as a Qualifying Activity, unless it can be brought within some other item on the Qualifying Activities list, for instance qualifying distribution from a Designated Zone.

[1] According to Sec. 10.5 of CTGFZP1, “activities that might constitute the Qualifying Activity of trading in Qualifying Commodities include the following, where done in relation to Qualifying Commodities [include] Buying and selling: This is the act of purchasing commodities at a lower price and selling them at a higher price to make a profit that requires a deep understanding of market trends and price dynamics”. Warehousing (the storage or housing of Qualifying Commodities before they are delivered to the buyer) and Delivery (the transportation of the Qualifying Commodities to the buyer) for a trader “might be treated as  ancillary to the Qualifying Activity of trading in Qualifying Commodities, provided that they naturally and integrally complement the main Qualifying Activity and meet the conditions for ancillary activities”.

The structure of MD 229: trading, distribution and logistics are not synonyms

A useful starting point is the architecture of MD 229. Article 2(1) lists the activities that may count as Qualifying Activities when conducted by a QFZP. Among them are:

• Trading of Qualifying Commodities;
• Distribution of goods or materials in or from a Designated Zone; and
• Logistics services.

Each of these is then separately defined in Article 2(3). Trading of Qualifying Commodities is defined, as noted above, by reference to physical trading in specified commodities, associated hedging and SCF, subject to the 51% distribution/W/L/IM guardrail.

Distribution is defined in operational and geographical terms: the QFZP buys and sells tangible goods or materials. It may import them into a Designated Zone. It can store them, manage inventory and handling, and arrange transport and export. The goods must be supplied to specified categories of customers. The flows must either avoid import into the UAE altogether, or, if there is an import, the route must pass through a Designated Zone.

Logistics services, in turn, refer to storage and transportation performed on behalf of another person, without the service provider taking title to the goods, and remunerated as a services business rather than as a trader.

If the legislator had intended “trading” and “distribution” to be the same thing in substance, it could have collapsed them into one category. It did not. Instead, MD 229 clarifies and, in some respects, expands the scope of Trading of Qualifying Commodities (including industrial chemicals and environmental commodities) while preserving distribution and logistics as separate headings.

This structural choice is significant. It indicates that Trading of Qualifying Commodities is not merely a type of distribution, nor is distribution merely another name for trading. Rather, they are distinct commercial profiles within a single framework, where an activity is analyzed under Trading of Qualifying Commodities unless a substantial distribution component (breaching the 51% threshold) pushes it into the Distribution in or from a Designated Zone category, which is then tested under its own conditions.

What does “distribution” mean within a trading business?

The 51% limitation operates by reference to “revenue from distribution, warehousing, logistics or inventory-management functions”. This wording assumes that, within a trading business, those functions are conceptually separable from trading itself.

A helpful way to approach this may be to examine where the margin comes from.

In a trading-centered model, the decisive choices concern:

• what, when and with whom to buy and sell;
• how to price;
• how much price and credit risk to accept; and
• how to structure hedging and financing.

The trader may arrange shipment, contract with warehouses or inspection companies, and handle the mechanics of delivery, but these activities are not themselves marketed as a principal value. The trader does not design its business to earn an identifiable margin for storage, handling or transport. They are simply costs incurred in order to execute trades.

In a distribution-centered model, by contrast, the hallmark is a logistics-heavy go-to-market function. The distributor:

• maintains stock to meet demand;
• plans and manages inbound and outbound flows;
• accepts contractual obligations regarding availability, delivery times, storage conditions, shrinkage and other operational KPIs; and
• may run or contract for warehouses and transport as part of an integrated trade.

Even if the distributor also takes title to goods and formally trades them, an economically meaningful part of its margin is, in substance, remuneration for distribution and inventory-management functions.

From this angle, the decision in MD 229 to mention “distribution” separately from “warehousing, logistics, inventory-management” is not accidental. It suggests that “distribution” is meant as a broader commercial role, within which warehousing, logistics and inventory management are operational components that may be insourced or outsourced. By naming distribution explicitly, MD 229 ensures that a QFZP cannot avoid the 51% rule simply by outsourcing warehouses and trucks while retaining the commercial responsibilities and margins of a distributor.

At the same time, this drafting does not mean that any trader who moves or stores goods is automatically in “distribution”. A trader may, for example, briefly hold inventory in transit or contract with a third-party warehouse purely as an incident of trading, without offering warehousing as a service and without targeting a logistics margin. In such circumstances, the mere existence of movement and storage does not by itself transform trading revenue into distribution/W/L/IM revenue.

Trading without distribution and trading with distribution: where segregation comes in

If we accept the functional distinction above, we must acknowledge that there can be trading of Qualifying Commodities without “distribution” in the sense contemplated by MD 229. Consider a trader that:

• buys Qualifying Commodities from one supplier under standard trade terms (for example, FOB or FCA);
• sells on to another party under terms where title and risk pass at shipment or at the terminal;
• arranges freight or port handling purely to satisfy those trade terms, rebilling such costs without margin and clearly labelling them as disbursements; and
• does not undertake vendor-managed inventory, stock-keeping on behalf of customers, order fulfilment services, or logistics-linked service-level commitments.

In that situation, nearly all the trader’s revenue is appropriately described as trading revenue. It reflects price and risk intermediation in Qualifying Commodities. Logistics exists, but only as an incidental element required to perform trades, not as a revenue-generating function.

Under the working assumption that the 51% limitation applies to trading as a whole, such a trader would comfortably pass the guardrail. Its revenue from distribution/W/L/IM functions would be very low or nil. There is no textual indication in MD 229 that the absence of distribution is itself problematic. The provision is drafted in the negative: it disqualifies a trading activity if distribution/W/L/IM revenue reaches or exceeds 51% of total revenue. It does not state, nor imply, that trading must include distribution to qualify for the 0% rate.

The consequences become more delicate if we hold the same functional profile constant but change the nature of the goods. Suppose the trader conducts exactly the same type of activity, possibly even from or through a Designated Zone, but the goods in question do not meet the definition of Qualifying Commodities. Functionally, we are still looking at pure trading:

• the 51% guardrail is comfortably passed because there is no substantial distribution component, and
• the activity falls squarely within what MD 229 describes as trading rather than distribution.

However, once the analysis moves from “what is the activity?” to “is this a Qualifying Activity?”, the answer changes. The Trading of Qualifying Commodities category is, by definition, closed to goods that do not meet the Qualifying Commodity definition. At the same time, there is no basis for re-routing such trades into the Distribution of goods in or from a Designated Zone category, because the trader is not, in substance, performing distribution functions.

In this configuration, the fact that trades are executed in or from a Designated Zone does not rescue the position. The activity remains trading in non-Qualifying goods, and, unless it can be brought under some other item of the Qualifying Activities list, it is a candidate for disqualification from the 0% regime.

A contrast with manufacturing accompanied by distribution

The treatment suggested above for Trading of Qualifying Commodities sits in some tension with the way the FTA approaches “manufacturing of goods or materials” where distribution functions are present.

In CTGFZP1, manufacturing is framed as a Qualifying Activity in its own right, but distribution-type functions beyond an ancillary level are not automatically absorbed into that category. Where a manufacturer undertakes additional activities such as packing and loading finished products on pallets for delivery, the Guide treats the revenue attributable to those functions as non-qualifying unless it can be brought within some other Qualifying Activity (for example, distribution in or from a Designated Zone or logistics services.

In other words, for manufacturing the starting point is segmentation:

• core manufacturing revenue is qualifying;
• non-ancillary distribution/logistics revenue is carved out and must either fit within another Qualifying Activity (for instance, a separate distribution operation in a Designated Zone) or sit in the de minimis/non-qualifying bucket.

By contrast, under MD 229 the 51% limitation for Trading of Qualifying Commodities is drafted as a guardrail internal to the trading category itself. A QFZP loses access to the Trading of Qualifying Commodities category only where its revenue from distribution / warehousing / logistics / inventory-management functions reaches or exceeds 51% of its total revenue for the period. It is not expressed as a requirement to carve out all non-ancillary distribution revenue and test it separately under the “Distribution in or from a Designated Zone” limb, as the FTA does in the manufacturing examples.

On this reading, a trader whose business is still predominantly trading (even if it includes some distribution-like functions that are not merely incidental) need not, by default, split its revenue into (a) qualifying trading and (b) non-qualifying distribution for de minimis purposes. Instead, the first question is whether the distribution/W/L/IM share crosses the 51% threshold. If it does not, the activity remains within Trading of Qualifying Commodities, and the qualifying/non-qualifying analysis turns on whether the goods are “Qualifying Commodities” and whether the other conditions for that category are met, rather than on a separate functional split akin to the manufacturing examples.

Predominantly distribution models: can the entire revenue sit under the distribution limb?

If the logic above is accepted, the natural next question is whether a symmetric approach may apply in the reverse situation.

Suppose a Free Zone business carries on an integrated model that includes both trading and distribution. It buys and sells goods in its own name, takes price and credit risk, but also holds inventory, runs a Designated Zone hub, manages deliveries and accepts logistics-type KPIs. Assume that, on an economically robust view, more than 51% of its revenue is attributable to distribution / warehousing / logistics / inventory-management functions.

In that case the 51% limitation would, on its face, disqualify the activity from the “Trading of Qualifying Commodities” category. The question is whether the taxpayer is then required to:

• split the business into a distribution limb (potentially qualifying under “Distribution of goods or materials in or from a Designated Zone”) and a trading limb (qualifying only to the extent that trades involve Qualifying Commodities), with residual trading in non-Qualifying goods falling into the de minimis/non-qualifying pool; or
• treat the entire model as distribution, and analyze it solely under the distribution limb, with no further need to carve out a separate “trading of non-Qualifying goods” component.

There is a textual and structural argument for the second, more integrated view.

First, the definition of distribution of goods or materials in or from a Designated Zone is intentionally broad. It expressly encompasses buying and selling goods, including importation, storage, inventory management, handling, transportation and export, provided the activity is carried on in or from a Designated Zone and the goods are supplied to resellers or processors rather than end users. Trading-style elements such as holding title, earning a margin on resale and bearing inventory risk are not excluded from that definition. Indeed, the Guide describes distribution as typically including purchasing from a manufacturer and reselling to stores or other customers, with the distributor holding title and bearing the commercial risk on the stock.

Secondly, unlike the Trading of Qualifying Commodities category, the distribution limb is not limited to a specific list of commodities. Once the geographic and customer conditions are met,[1] any tangible goods can in principle fall within the Qualifying Activity of distribution.

On that foundation, one can argue that where a Free Zone business is, in substance, predominantly a distributor operating in or from a Designated Zone, and satisfies the distribution conditions, the natural home for all of its revenue is the distribution category. The trading features (price negotiation, hedging, timing of purchases and sales) become part of the commercial profile of that distribution business, rather than forming a separate trading limb that must be tested again under the Trading of Qualifying Commodities rubric.

Under this hypothesis, the 51% threshold acts as a “fork in the road”:

• below 51%, the activity is evaluated as Trading of Qualifying Commodities (subject to the Qualifying Commodity test and other conditions), without a mandatory carve-out of distribution revenue;
• at or above 51%, the activity is evaluated primarily as distribution in or from a Designated Zone, provided the statutory and guidance-based conditions for that category are satisfied, and without having to re-isolate a separate trading limb that is qualifying only where the goods are Qualifying Commodities.

This is not the only possible reading, and it would benefit from confirmation through administrative practice or a private clarification. But it offers a coherent way to avoid double segmentation and to align the treatment of mixed trading-and-distribution models with the broad wording of the distribution definition.

[1] Activities in or from a Designated Zone, goods imported through the Designated Zone where relevant and no supplies to end users.

Dealing with the 51% threshold in practice: allocation methods

Whichever interpretative path is chosen, the 51% limitation requires a practical method for identifying what portion of a QFZP’s revenue is properly attributable to distribution / warehousing / logistics / inventory-management.

Where distribution-type services are separately priced,[1] attribution is straightforward:

• these amounts are natural candidates for distribution/W/L/IM revenue in the numerator of the 51% fraction and,
• where the distribution limb is used, for allocation to that Qualifying Activity.

The examples in CTGFZP1 adopt a similar approach by isolating warehousing and delivery fees charged by a commodity trader and then assessing whether they are ancillary to the main trading activity.[2]

The difficulty lies in single composite prices, where logistics-heavy services are embedded in the trading margin. Here, tools familiar from IFRS 15 and transfer pricing can sensibly be deployed.

From a financial reporting perspective, IFRS 15 uses the concept of a stand-alone selling price to allocate consideration to distinct performance obligations. Where comparable stand-alone prices for warehousing, delivery or related services can be observed in the market, these can provide a principled basis for carving out a notional “distribution” component from an all-in trading price.

From a transfer pricing perspective, functional analysis, comparability and the allocation of returns to functions and risks are at the core of pricing. If a Free Zone trader’s logistics functions and associated risks are significant and economically separable, an internal cost-plus on directly attributable logistics costs, or a margin benchmarked against third-party logistics providers, may be used to identify a reasonable share of the overall margin that is in substance remuneration for distribution/W/L/IM.

While IFRS 15 and transfer pricing are not identical regimes, their underlying logic is compatible: both look for economically meaningful stand-alone values for distinct functions and services. For Free Zone commodity traders, the pragmatic approach is to design a single, well-documented allocation framework that can be defended both in financial reporting terms (as a reasonable revenue allocation) and in tax terms (as a reasonable attribution of revenue to distribution/W/L/IM for the 51% test and, where relevant, to the distribution or logistics Qualifying Activities). The key is consistency: the same story should be told in the financial statements, the transfer pricing documentation and the Free Zone corporate tax analysis.

A separate point is the treatment of pass-through items. Where a QFZP simply rebills third-party freight, port charges, inspection fees or similar costs at cost, and clearly labels them in contracts and invoices as disbursements or reimbursed expenses, these amounts are not “revenue” in any meaningful sense. Properly documented, they should be excluded both from the numerator and the denominator of the 51% fraction, and from the distribution limb altogether. The focus should remain on amounts for which the QFZP actually earns a margin in return for performing distribution/W/L/IM functions.

[1] For example, explicit storage fees, delivery charges, vendor-managed-inventory fees or handling charges.

[2] CTGFZP1, Example 54.

Practical consequences: mapping functions and choosing a route

Against this background, the interpretative approach outlined in this article leads to three practical imperatives for Free Zone commodity businesses.

First, they need a precise narrative of what they actually do. Who initiates and approves purchases and sales? Who bears market and credit risk? Who undertakes and who contractually promises storage, handling and delivery, and who holds title (and when it passes)? These questions help to describe the profile of the business. The trading–distribution distinction then turns on how these functions are remunerated in practice: whether the margin is earned primarily for price and risk intermediation, or for warehousing, logistics and inventory-management services. These questions should be answered consistently across corporate tax memoranda, transfer pricing reports and internal policies.

Secondly, they need to map those functions onto revenue streams in a way that supports whichever “route” they wish to rely on:

• a predominantly trading model under the Trading of Qualifying Commodities category, where the 51% limitation is satisfied and the focus is on whether the goods meet the Qualifying Commodity definition; or
• a predominantly distribution model under the “Distribution of goods or materials in or from a Designated Zone” category, where the Designated Zone and non-end-user conditions are met and the goods need not be Qualifying Commodities.

Thirdly, they should consciously decide whether to operate near the boundary. A business whose economics are close to the 51% line may wish to simplify its operating model (for example, by outsourcing more logistics on a true pass-through basis, or, conversely, by reinforcing its Designated Zone distribution profile so as to sit clearly in the distribution limb). In borderline cases, a private clarification request, grounded in a careful functional and revenue analysis, may be the safest way to obtain certainty.

On this reading, MD 229 does not collapse trading and distribution into a single undifferentiated concept. Instead, it offers two distinct pathways to the 0% rate for commodity-related Free Zone businesses:

• one focused on trading in Qualifying Commodities, with an internal 51% guardrail against becoming a de facto distributor or logistics operator, and
• another focused on distribution in or from a Designated Zone, where the nature of the goods is less constrained but the geographic and customer conditions are strict.

The challenge (and the opportunity) lies in choosing the path that best matches the real business and documenting that choice in a way that can withstand scrutiny.

Acknowledgement

I would like to express my sincere gratitude to Alexey Zhukov, whose insightful ideas and thought-provoking questions inspired the research direction of this study and helped shape the problematic examined herein.

Disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.