Free zone company? The 0% Corporate Tax rate is not automatic
The 0% rate applies only to a Qualifying Free Zone Person that meets every condition — substance, qualifying income, audited accounts and the de minimis test. Miss one and you pay 9% for five years.
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- Is a UAE free zone company automatically taxed at 0%?
- No. Only a Qualifying Free Zone Person pays 0%, and only on qualifying income, while it meets every condition: adequate substance, qualifying income, the de minimis test, audited financial statements and transfer-pricing compliance. Other income is taxed at 9%.
- What is the de minimis test for free zone companies?
- Non-qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue. A breach means losing Qualifying Free Zone Person status for that year and the next four.
- Do free zone companies need audited accounts?
- Yes. Audited financial statements are mandatory for every Qualifying Free Zone Person, whatever its size.
- Are sales to mainland UAE customers qualifying income?
- Generally not, unless they fall under a qualifying activity. Income attributable to a mainland branch or permanent establishment is taxed at 9%.
Many free zone owners assume their company pays no Corporate Tax. The law says something narrower: a Qualifying Free Zone Person (QFZP) pays 0% on its qualifying income and 9% on everything else — and only while it meets all of the conditions.
The conditions
- Adequate substance in the free zone: the core income-generating activities are carried out there, with enough staff, premises and spending.
- Qualifying income: income from transactions with other free zone persons, income from a list of qualifying activities (manufacturing, holding of shares, fund and wealth management, logistics, headquarters services and others), and income from qualifying intellectual property.
- De minimis test: non-qualifying revenue must not exceed the lower of AED 5 million or 5% of total revenue. Breach it and the company loses QFZP status for that year and the next four.
- Audited financial statements — mandatory for every QFZP, whatever its size.
- No election to be taxed at 9%, and compliance with the transfer-pricing rules and documentation.
How we help: Free zone accounting (IFZA, DMCC, Meydan and more) — the 0% Qualifying Free Zone Person test checked every year.
The traps
Sales to mainland UAE customers are generally excluded income unless they fall under a qualifying activity, and income attributable to a mainland branch or a permanent establishment is taxed at 9%. A trading company in a free zone that sells mostly to Dubai mainland customers will rarely qualify — and if it claims 0% incorrectly, the return is wrong.
Deciding what to claim
The analysis has to be done every year, before the return is filed. Our free zone 0% claim (the QFZP analysis, added to any Corporate Tax package) documents each condition, runs the de minimis test on the actual revenue split and coordinates the audit, so the position taken on the return can be defended if the FTA asks.