How are Qualifying Free Zone Persons taxed under UAE Corporate Tax

A Qualifying Free Zone Person is a legal entity that meets specific requirements and is established in a free zone. As per the UAE corporate tax law, a Qualifying Free Zone Person ("QFZP") is subject to a 0% corporate tax rate on qualifying income or qualifying activity and a 9% rate on non-qualifying income.

What are Qualifying Activities?

The UAE Corporate Tax Law outlines qualifying activities, such as;

• Intellectual property rights.
• Investigation and creation.
• Production and manufacturing.
• Transport and logistics, expert services, and
• Exchange and dissemination.

Whereas, at least half of the QFZP's income must originate from these qualifying activities.

No more than half of the QFZP's total revenue should come from transactions with connected parties, including entities under common control or controlled by the QFZP. To determine eligibility as a Qualifying Free Zone Person, consultation with the UAE's tax professionals is advisable.

Qualifying income for QFZP tax relief is the taxable income derived from qualifying activities, excluding income from excluded activities listed in the UAE Corporate Tax Law, such as taking natural resources out of circulation, banking operations, and real estate property.

Qualifying Free Zone Persons enjoy a preferential 0% corporate tax rate on qualifying income. However, those failing to meet QFZP requirements are subject to a de minimis provision, leading to a 9% tax rate for at least five years.

The recent decisions regarding the de minimis threshold signal a significant shift in the Free Zone regime's landscape in the UAE. Entities in Free Zones may need to reassess their tax status promptly.

Intercompany transactions involving QFZPs are generally exempt from corporate tax, but exceptions exist, especially concerning transactions aimed at circumventing the de minimis clause. Dubai tax consultants can provide guidance on these rules.

Compliance requirements for QFZPs include corporate tax registration, submission of tax returns, maintenance of accounting documentation, and tax payments. Businesses in Free Free Zones are attracted by the 0% corporate tax rate on Qualifying Income, but understanding and meeting the eligibility criteria and compliance requirements are crucial.

 

What Are the Requirements for 0% Corporate Tax in UAE Free Zones?

To qualify as a Qualifying Free Zone Person (QFZP) and enjoy 0% UAE corporate tax, businesses must meet these criteria in 2024:

• 1. Eligible Activities: Engage in manufacturing, trading, logistics, or services (excludes banking, real estate, insurance).
• 2. Substance Requirements:
  • Physical office in the free zone
  • Full-time employees in UAE
  • Annual operational expenditure ≥ AED 100,000
• 3. Income Sourcing: Earn ≤ 5% income from UAE mainland (via branches only).
• 4. Compliance: File annual Audited Financials and Substance Report with FTA.

⚠️ Penalty for Non-Compliance: Loss of 0% status + retroactive 9% tax + fines up to AED 50,000.

UAE Corporate Tax for Free Zones

To qualify for 0% tax, your free zone entity must:

• Conduct "Qualifying Activities" (e.g., manufacturing, trading, logistics).

• Excluded Activities: Banking, insurance, real estate (taxed at 9%).

• Meet "Adequate Substance" (office, staff, operational expenditure).

• Not earn UAE mainland-sourced income (unless via a branch).

Qualified vs Excluded Activities

Avail the Expert Services of Tax Consultants in the UAE

Tax consultants in Dubai can assist in identifying eligibility for a Qualifying Free Zone Company. They evaluate a company's operations, structure, and revenue sources to ensure compliance with free zone authorities' rules. Additionally, tax consultants offer strategic advice to optimize tax situations and ensure adherence to relevant regulations, contributing to financial efficiency and regulatory compliance in the dynamic business environment of Dubai and the UAE. Thus, contact us today and we shall be glad to assist you. 

Protect your 0% tax status! Our experts handle:

• Substance Compliance Setup

• FTA Reporting & Audits

• Activity Restructuring
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FAQs

Q1: Can a free zone company sell goods in the UAE mainland?
A: Yes, but only through a taxable branch (subject to 9% tax on mainland income).

Q2: What is the penalty for failing substance requirements?
A: Loss of 0% status + retroactive 9% tax + AED 20,000 fine.

Q3: Do free zone consultancies qualify for 0% tax?
A: Only if they serve clients outside UAE (onshore clients trigger 9% tax)