Free Zones are an integral part of the UAE economy and play a critical role in driving economic growth and transformation both in the UAE and internationally. Free Zones offer businesses various benefits such as relaxed foreign ownership restrictions, streamlined administrative procedures, modern and sophisticated infrastructure, developed business communities and the availability of additional legal entity formsand commercial activities.

To recognize the continued importance of Free Zones, the UAE Corporate Tax rules enable Free Zone companies and branches that meet certain conditions to benefit from a 0% Corporate Tax rate on certain Qualifying Activities and transactions.

Here’s a more detailed breakdown of the conditions to be a Qualifying Free Zone Person (QFZP) eligible for the 0% corporate tax rate in the UAE, along with additional considerations:

 

1. Incorporation or Registration in a Free Zone

   - The entity must be established and operating in one of the Designated Free Zones in the UAE, which are recognized by the government for favorable tax treatment.

   - A company must hold a valid trade license issued by the Free Zone authority.

   - Free Zone businesses that engage in mainland UAE activities may not qualify for the 0% rate on income derived from mainland sources.

 

 2. Qualifying Income

   Qualifying income generally refers to:

     - Income derived from transactions with other Free Zone entities.

     - Income from doing business with entities outside the UAE.

     - Income from specific regulated activities approved by UAE government.

     - Passive income such as interest, royalties, dividends, and capital gains.

    Non-qualifying income refers to income earned from business with mainland UAE customers or    entities, which may be subject to the regular corporate tax rate of 9%.

 

 3. Substance Requirements

 To avoid being classified as a shell or passive entity, the Free Zone company must show it has     substantial business activities in the UAE.

   This include:

     - Maintaining physical office space or other facilities within the Free Zone.

     - Employing an adequate number of qualified staff to carry out core income-generating activities.

     - Incurring operational expenses that are proportionate to the nature and scope of its activities.

 

 4. Compliance with Regulatory Requirements

   The Free Zone business must:

     - Fulfill all Free Zone licensing conditions and other regulatory requirements.

     - Maintain its status in good standing with the relevant Free Zone authority, including renewal of licenses.

     - Submit annual reports or declarations as required by the Free Zone and tax authorities.

   - Failure to comply may lead to disqualification from receiving the 0% tax rate.

 

5. Accounting  and Financial Reporting

 

   - The Free Zone entity must prepare and maintain proper accounting records that comply with the relevant International Financial Reporting Standards (IFRS) and maintain audited financial statements.

   - Companies must file accurate financial statements and corporate tax returns with the UAE Federal Tax Authority (FTA) on an annual basis.

 

 6. Electing Taxation Status

   - The entity must formally opt-in to be treated as a Qualifying Free Zone Person under the 0% corporate tax regime.

   - Companies that do not wish to benefit from the 0% rate (e.g., those with extensive mainland operations) may elect to be taxed at the standard 9% corporate tax rate.

 

 7. Transfer Pricing Compliance

   -Free Zone companies engaged in transactions with related parties must comply with Transfer Pricing rules, ensuring that all transactions are conducted at arm’s length (i.e., on market terms).

   - These entities are required to maintain documentation to demonstrate compliance with Transfer Pricing regulations.

 

8.  The non-qualifying Revenue must meet the de Minimis requirements

The de Minimis requirements are met if the Free Zone Person’s non-qualifying

Revenue does not exceed the lower of:

- AED 5,000,000, or

- 5% of its total Revenue

The Free Zone Person’s non-qualifying Revenue in a Tax Period is Revenue derived

from:

- Excluded Activities,

- Activities that are not Qualifying Activities where the other party to the transaction

is a Non-Free Zone Person, and

-Transactions with a Free Zone Person where such Free Zone Person is not the

Beneficial Recipient of the relevant services or Goods.

 

If the Free Zone Person meets all the conditions (including the de Minimis

requirements) to be a QFZP, it will be subject to Corporate Tax at the following rates:

• 0% on its Qualifying Income, and

• 9% on its Taxable Income that is not Qualifying Income.

 

Losing status of a QFZP

   If a Free Zone company fails to comply with the statutory requirements (e.g., failure to meet substance rules, failure to maintain records), the company could lose its status as a Qualifying Free Zone Person and be subject to higher tax rates.

 

By meeting these conditions, a Free Zone company can benefit from the *0% corporate tax* on its qualifying income. However, the company must ensure full compliance with UAE Corporate Tax Law, substance requirements, and accounting standards to maintain its tax-advantaged status.

 

Contact ZIDINI for Assistance

Should you require any further assistance or clarification regarding the process of qualifying as a Free Zone entity for the 0% corporate tax rate or need help with any other related matters reach out to us. Our team is available to guide you through the requirements, answer any questions, and provide the necessary support to ensure compliance with the UAE Corporate Tax Law.