The performance of a distributed static compensator (DSTATCOM) is decided by an appropriate system topology as well as control algorithm. A Z-source inverter (ZSI) based DSTATCOM is introduced in this paper to improve the power quality of a three phase distribution system using the icosΘ (i-cos-Theta) control algorithm. Mainly, the proposed system is presented for harmonics mitigation of the supply signals and elimination of excessive current in the system due to a single phase fault in the load. Simulation results indicate that the total harmonic distortion (THD) of the supply current is found good, and it is satisfied the IEEE-519 standards on the harmonic limit and also the supply is almost balanced during the fault condition. All the simulation activities of the system are carried out in MATLAB/Simulink software.