This paper presents a novel control strategy for selective compensation of power quality (PQ) problems, depending upon the limited rating of voltage source inverters (VSIs), through a unified power quality conditioner (UPQC) in a three-phase four-wire distribution system. The UPQC is realized by the integration of series and shunt active power filters (APFs) sharing a common dc bus capacitor. The shunt APF is realized using a three-phase, four-leg voltage source inverter (VSI), while a three-leg VSI is employed for the series APF of the three-phase four-wire UPQC. The proposed control scheme for the shunt APF, decomposes the load current into harmonic components generated by consumer and distorted utility. In addition to this, the positive and negative sequence fundamental frequency active components, the reactive components and harmonic components of load currents are decomposed in synchronous reference frame (SRF). The control scheme of the shunt APF performs with priority based schemes, which respects the limited rating of the VSI. For voltage harmonic mitigation, a control scheme based on SRF theory is employed for the series APF of the UPQC. The performance of the proposed control scheme of the UPQC is validated through simulations using MATLAB software with its Simulink and Power System Block set toolboxes.