A free zone license in itself does not provide tax exemption. The company enters the federal corporate tax, registers and files a return. The zero rate applies only to a Qualifying Income company that meets all the conditions of a Qualifying Free Zone Person.
- The 0% applies to Qualifying Income and not to all profits of any free zone company.
- We need adequate substance, qualifying income, arm’s length, documentation and audited reporting.
- Ineligible revenue must not exceed the lesser of 5% of total revenue or AED 5 million.
- Violation of the condition usually deprives the regime from the beginning of the relevant period and for four subsequent periods.
01
Who can be a Qualifying Free Zone Person
A legal entity registered in a qualifying free zone, including its branch, can apply if it is a Free Zone Person under corporate tax law. The company must maintain adequate substance in the UAE, receive Qualifying Income, not choose the usual taxation regime and comply with other established requirements.
The status is analyzed for each tax period. The commercial promises of a zone upon registration do not replace the tax qualifications of specific transactions.
02
Six Key Conditions
- 01
Adequate economic activity and sufficient assets, employees and expenses in the free zone.
- 02
Receiving Qualifying Income according to established categories.
- 03
De minimis compliance for non-qualifying revenue.
- 04
The arm's length principle and transfer pricing requirements.
- 05
Maintaining audited financial statements.
- 06
No choice to be taxed according to the usual regime.
03
What can be Qualifying Income
The result depends both on the counterparty and the type of activity. Income from another Free Zone Person may be qualifying if the counterparty is a beneficial recipient and the operation does not belong to an Excluded Activity. Income from a Non-Free Zone Person must generally arise from an expressly listed Qualifying Activity.
The beneficial recipient and the absence of excluded activity are checked.
You need a qualifying activity from the established list.
A separate nexus approach and qualifying expenditure calculation are used.
They can remain at 0% only within de minimis limits and when the regime is performed.
04
Qualifying and Excluded Activities
Qualifying activities include, but are not limited to, production and processing of goods, ownership of shares and other securities, ownership and operation of ships, reinsurance, regulated management of funds and assets, headquarter services to related parties, treasury and financing services to related parties, aircraft financing and leasing, distribution to or from a designated zone under special conditions, and logistics services.
Excluded activities, with specified exceptions, include transactions with individuals, certain banking, insurance and financial services, ownership or use of certain real estate and income from intellectual property that is not Qualifying Intellectual Property Income.
One word in a license does not determine the tax result. The actual function, contract, counterparty, place of performance and applicable ministerial decision are analyzed.
05
The de minimis rule
Revenue not meeting the criteria must not exceed the lesser of 5% of total revenue or AED 5 million. There are special exceptions in the calculation, in particular for income attributable to domestic or foreign permanent establishment, and certain real estate.
De minimis does not turn excluded income into Qualifying Income. It only allows you to maintain your status with a limited amount of revenue that does not meet the criteria; the corresponding taxable income is taxed according to the rules of the regime.
06
Permanent establishments and real estate
Profits attributable to a domestic permanent establishment outside a free zone or to a foreign permanent establishment are calculated as if it were a separate independent enterprise and are generally taxed at a rate of 9%.
There is a special matrix for real estate. Income from commercial real estate in a free zone when transactions with Free Zone Persons may be treated differently than residential real estate, a property outside the free zone or a transaction with Non-Free Zone Persons.
07
Substance, employees and outsourcing
The company must conduct core income-generating activities in the free zone and have adequate assets, qualified employees and operating expenses. Outsourcing within a free zone or designated zone is allowed if there is sufficient supervision; Qualifying IP has special rules.
A mailing address, a flexi-desk and a formal director do not prove substance if the scale of functions, people and expenses does not correspond to the income received.
08
What happens when there is a violation
If a company ceases to meet any condition of the qualifying regime, it usually loses status from the beginning of the relevant tax period and cannot benefit from the regime for a further four subsequent periods. The ordinary corporate tax is then applied to the taxable income.
The consequences may affect the entire period, not just the specific problematic transaction. Therefore, the income structure and de minimis need to be monitored during the year, and not after its end.
09
Annual control of the company
- 01
Check the zone and legal status of the company.
- 02
Post revenue by counterparties and types of activities.
- 03
Separately check excluded activities, PE, real estate and IP.
- 04
Calculate de minimis before the period closes.
- 05
Confirm substance, outsourcing and management control.
- 06
Update transfer pricing file and audited reporting.
- 07
Submit the declaration and calculation within the prescribed period.