Starting or running a free-zone business in the UAE? With the introduction of the UAE Corporate Tax (CT) regime on 1 June 2023, understanding how to stay compliant — and when you can confidently benefit — is essential. In this article, we break down 10 crucial aspects of the CT regime specifically for UAE free-zone companies, offering clarity, practical examples, and professional insight.
1. Understanding the Two Tax Rates: 0% vs 9%
Under UAE law:
- 0% CT rate applies to Qualifying Income if your company qualifies as a Qualifying Free Zone Person (QFZP).
- Otherwise, your company follows the standard CT regime with:
- 0% for taxable profits up to AED 375,000.
- 9% on profits above AED 375,000.
- 0% for taxable profits up to AED 375,000.
Being a QFZP means that Qualifying Income enjoys a 0% rate, regardless of the AED threshold. For example, if your Free Zone company qualifies as a QFZP and earns AED 10 million solely from qualifying income, you pay 0% CT on the full AED 10 million.
2. What Makes You a Qualifying Free Zone Person (QFZP)
To be a QFZP, your company must meet every condition laid out in the FTA’s CT Free Zone Persons Guide:
- Be registered in a recognized UAE Free Zone.
- Maintain adequate substance in the Free Zone.
- Derive Qualifying Income.
- Not opt into the standard CT rules.
- Abide by the arm’s length principle and maintain Transfer Pricing documentation.
- Hold audited financial statements.
- Meet de minimis requirements for non-qualifying income.
If any element is missing — or you choose to opt in to the standard CT regime — you lose QFZP status for that year and the following four tax years.
3. Defining “Qualifying Income” vs Non-Qualifying Income
Qualifying Income includes:
- Transactions between Free-Zone Persons where the recipient is the Beneficial Recipient.
- Income from qualifying activities (e.g. exports, intellectual property, specified services) that aren’t excluded.
- Profit from qualifying intellectual property.
- Other income that meets de minimis thresholds.
Non-Qualifying Income includes:
- Domestic mainland transactions.
- Real estate or IP that doesn’t meet the rules.
- Income from permanent establishments outside the Free Zone. This income is taxed at 9%, even if you’re a QFZP.
For example, selling software licenses to a mainland UAE client generates non-qualifying income taxable at 9%, whereas export sales outside UAE remain qualifying and taxed at 0%.
4. Meeting Substance Requirements — It’s More Than Just a PO Box
To keep QFZP status, your Free Zone company must demonstrate real operations:
- Perform core income-generating activities within the Free Zone or designated zone.
- Employ adequate full-time, qualified staff.
- Have physical premises and sufficient operating expenses.
- Outsourced activities are allowed — only if adequately supervised within the Free Zone.
A company headquartered abroad or operating mainly online won’t qualify. However, companies with online operations may qualify if they have genuine substance in the Free Zone (e.g., staff and premises supporting their income-generating activity).
5. The De Minimis Rule: Tolerance for Minor Non-Qualifying Revenue
If your non-qualifying revenue exceeds thresholds, you lose QFZP benefits. The FTA sets this threshold to:
- 5% of total revenue, or
- AED 5 million — whichever is lower.
This calculation excludes certain items (like domestic establishment income or non-GTZ IP). The guide offers clear examples of how to apply these rules.
6. What Happens If You Lose QFZP Status?
One slip — or a voluntary opt-in to standard CT — means:
- You lose QFZP status for that year plus the next four tax years.
- Your revenue is taxed at 9% above AED 375,000, and you lose all related reliefs or exemptions.
This shows how vital it is to stay compliant and maintain documentation — including audits and substance proofs.
7. Arm’s Length Principle & Transfer Pricing Rules
Free-zone companies must apply the arm’s length principle for transactions with related parties. You must maintain the following documentation when thresholds are met:
- Master File
- Local File
- Disclosure Form
This requirement ensures fair pricing across related entities and is central to FTA compliance.
8. Filing Obligations & Required Documentation
Your company must:
- Register for CT and obtain a Tax Registration Number (TRN) via the FTA portal.
- File an annual CT return within 9 months of your financial year-end.
- Keep relevant records — including audited financial statements and transfer pricing docs — for at least 7 years.
- Be prepared for FTA requests for documentation to support your QFZP status.
9. Penalties for Non-Compliance Can Be Severe
Failure to comply incurs penalties:
- AED 10,000 for late registration.
- AED 500 per month for late CT returns.
- Up to 200% penalty for incorrect or misleading filings.
That’s why proactive compliance and expert guidance are critical, not just to save money, but to avoid costly legal issues.
10. How Exval Helps You Stay Compliant & Efficient
At Exval, we support expat entrepreneurs with tailored corporate tax solutions for free-zone companies:
- QFZP status assessments and strategy to maximise 0% benefits.
- Compliance with substance requirements and documentation.
- Segregation of qualifying and non-qualifying income to meet de minimis rules.
- Transfer pricing studies and documentation preparation.
- Preparation of audited IFRS financial statements and CT returns.
- Transparent service, no hidden fees, and full remote support.
Our team blends European best practices with deep knowledge of UAE tax law — perfect for expats looking for reliability and clarity.
Final Thoughts
Corporate tax for UAE free zone entities is no longer straightforward, but it can be manageable with the right guidance. With proper planning, your company can remain compliant while enjoying competitive tax benefits.
Stay informed. Stay compliant. And when you’re ready, reach out to Exval — where expat business owners find peace of mind for their corporate tax needs.