How UAE Corporate tax Affects Free Zone Companies

Free Zone companies are within UAE Corporate tax

A company does not sit outside Corporate tax merely because it is licensed in a UAE Free Zone. A Free Zone Person must assess registration, return filing, accounting records, transfer pricing and the rate that applies to each category of income. The preferential 0% rate is conditional.

What is a Qualifying Free Zone Person?

A Qualifying Free Zone Person is a Free Zone Person that meets all applicable conditions for the tax period. These include adequate substance in the UAE, Qualifying Income, the de minimis requirement, no election into the ordinary Corporate tax regime, transfer-pricing compliance and audited financial statements. Additional statutory conditions and decisions must also be considered.

How the 0% and 9% rates interact

A QFZP can apply 0% to Qualifying Income. Taxable income that is not Qualifying Income is generally subject to 9%; the ordinary AED 375,000 zero-rate band does not apply to a QFZP’s non-qualifying taxable income. Profits attributable to a Domestic Permanent Establishment outside the Free Zone or a Foreign Permanent Establishment require separate treatment.

Qualifying and excluded activities

The result depends on the activity, counterparty, location and statutory category. Income from transactions with another Free Zone Person may qualify where the recipient is the Beneficial Recipient and the income is not from an Excluded Activity. Transactions with non-Free-Zone persons generally require a Qualifying Activity analysis. Immovable property and intellectual property have specific rules.

The de minimis test

Non-qualifying Revenue must remain within the lower of AED 5 million or 5% of total Revenue for the tax period. The calculation is technical and may exclude or separately treat specified Revenue. Businesses should build the test from transaction-level records rather than applying 5% to accounting profit.

Audit, substance and transfer pricing

A QFZP must prepare and maintain audited financial statements. Adequate substance requires core income-generating activities, assets, qualified employees and operating expenditure appropriate to the activities. Related-party and Connected Person transactions remain subject to the arm’s-length principle, disclosures and applicable documentation rules.

What happens if a condition is breached?

Failure to meet a QFZP condition can cause the person to cease being a QFZP from the beginning of that tax period and for the following four tax periods. This makes a pre-return assessment and documented monitoring process important.

Free Zone Corporate tax review checklist

• Map each revenue stream by activity, customer, location and legal entity.
• Test Qualifying and Excluded Activities and Beneficial Recipient conditions.
• Calculate the de minimis threshold from supported Revenue data.
• Document adequate substance and permanent-establishment exposure.
• Complete the audit and reconcile the financial statements to the return.
• Align intercompany agreements, transfer pricing and Corporate tax disclosures.

How SAIF Chartered Accountants can help

We support Free Zone businesses with QFZP assessments, audited financial statements, transaction classification, de minimis calculations, transfer pricing and Corporate tax Return preparation.