Free Zone Corporate Tax in the UAE: How to Keep the 0% Rate

The two rates a free zone company can face

A Qualifying Free Zone Person (QFZP) pays 0% on qualifying income and 9% on any taxable income that is not qualifying. A free zone company that is not a QFZP is taxed like a mainland company: 0% up to AED 375,000 and 9% above.

The conditions to be a Qualifying Free Zone Person

1. Adequate substance in a free zone — core income-generating activities carried out in the free zone, with assets, qualified staff and operating expenses that match the activity.
2. Qualifying income — from qualifying activities and permitted transactions.
3. No election to be taxed under the standard Corporate Tax regime.
4. Transfer pricing compliance — related-party transactions at arm's length, with documentation where required.
5. Audited financial statements for every tax period, whatever the revenue.
6. The de minimis test — non-qualifying revenue within the permitted limit.

Qualifying activities

The list of qualifying activities includes:

• manufacturing and processing of goods or materials;
• trading of qualifying commodities, and holding of shares and other securities;
• ownership, management and operation of ships; reinsurance; fund management and wealth and investment management services;
• headquarters services, and treasury and financing services, to related parties;
• financing and leasing of aircraft;
• distribution of goods or materials in or from a designated zone to a customer that resells or processes them;
• logistics services, and activities ancillary to the above.

Transactions with other free zone persons can also produce qualifying income, while many transactions with mainland customers and individuals do not. Map your revenue line by line rather than assuming.

The de minimis test

Non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million in the tax period. Certain income — such as income attributable to a permanent establishment, and some free zone real estate income — is taxed separately and left out of the calculation.

What happens if you fail

If any condition is not met, the company stops being a QFZP from the start of that tax period and for the following four — five years in total under the standard regime. A single year of unmonitored mainland sales can therefore cost far more than the tax on those sales.

Practical steps for free zone companies

• Split revenue in your accounting system by customer type and activity, so the de minimis test is measured monthly — not discovered at year-end.
• Document substance: lease, staff, board decisions and where the work is actually done.
• Price and document related-party transactions at arm's length.
• Plan the annual audit early — see who needs audited financial statements.
• Remember that Small Business Relief is not available to a QFZP, and that you must still register and file a Corporate Tax return.

How Business Future CPA helps

We review whether your company qualifies, map revenue against the qualifying activities, set up the de minimis tracking in your books, prepare audit-ready financial statements and file the return. See our Corporate Tax services and the full UAE Corporate Tax guide.