Free Zone Corporate Tax: Qualifying Free Zone Person Status

A UAE free zone company is not automatically exempt from Corporate Tax. It pays 0% only on qualifying income, and only if it meets every condition to be a Qualifying Free Zone Person (QFZP) in that tax period. Fail one condition and the company is taxed at 9% on all of its taxable income for that year and the following four years. Dawn Consultancy audits free zone companies in DMCC, JAFZA, DAFZA, DSO, DIFC, IFZA, RAKEZ and SAIF Zone, and assesses QFZP eligibility as part of the audit so the position is settled before the return is filed.

The conditions

To be a Qualifying Free Zone Person, a company must, in each tax period:

1. Be incorporated or registered in a free zone (or designated zone) listed by the Ministry of Finance
2. Maintain adequate substance in the free zone: core income-generating activities carried out there, with adequate staff, premises and expenditure
3. Derive qualifying income (see below)
4. Not have elected to be subject to the standard 9% regime
5. Comply with transfer pricing rules and documentation
6. Prepare and maintain audited financial statements, regardless of revenue
7. Keep non-qualifying revenue within the de minimis limit: the lower of 5% of total revenue or AED 5 million

What counts as qualifying income

• Income from transactions with other free zone persons, where that free zone person is the beneficial recipient
• Income from qualifying activities with any customer, mainland or foreign, including manufacturing and processing of goods, trading of qualifying commodities, holding of shares and securities, ownership and operation of ships, reinsurance, fund and wealth management, headquarter services to related parties, treasury and financing services to related parties, financing and leasing of aircraft, logistics services, and distribution of goods from a designated zone to resellers
• Income from qualifying intellectual property, calculated under the nexus approach
• Income from immovable property located in a free zone, when derived from transactions with other free zone persons (commercial property only)

Income from excluded activities is never qualifying: transactions with natural persons (with limited exceptions), regulated banking, insurance and finance activities, ownership of non-commercial or mainland immovable property, and non-qualifying intellectual property. Income from mainland customers for services that are not qualifying activities is also non-qualifying and counts toward the de minimis limit.

The de minimis test in practice

A DMCC trading company with AED 20 million revenue, of which AED 1.5 million is from mainland UAE customers for non-qualifying services, has non-qualifying revenue of 7.5%, above the 5% limit. It loses QFZP status for the year and the next four. The same company with AED 900,000 of such revenue (4.5%) keeps QFZP status, pays 0% on the qualifying income, and 9% on the AED 900,000 (the non-qualifying part is still taxed). Getting the revenue classification right, contract by contract, is the core of the work.

Our service

• Revenue mapping: each income stream classified as qualifying, excluded or non-qualifying, with the de minimis calculation
• Substance review: staff, premises, outsourcing arrangements and board activity documented
• Audited financial statements prepared to meet the QFZP condition
• Transfer pricing disclosure and documentation for related-party transactions, including the arm’s-length pricing of headquarter and treasury services
• Election analysis where a company would be better off under the standard regime (for example, to use tax losses or group relief)
• Restructuring advice where mainland activities should be moved to a separate mainland entity to protect free zone status

Frequently asked questions

Does my free zone company still need to register and file?
Yes. Registration deadlines and the nine-month filing deadline apply to free zone companies exactly as to mainland companies.

My free zone company only has a mainland branch. Is the branch income qualifying?
No. Income attributable to a mainland branch or permanent establishment is taxed at 9%, and the free zone entity must account for it separately.

Is audited financial statements a condition even for a small free zone company?
Yes. The audited-accounts condition has no revenue threshold for QFZPs.

Can a free zone company use Small Business Relief instead?
A QFZP cannot claim Small Business Relief. A free zone company that does not qualify or elects out of the free zone regime can claim it if revenue is AED 3 million or less.

What happens if I fail one condition in a year?
The company is taxed at 9% on all taxable income for that tax period and the following four tax periods.

Get an assessment

Send your trade licence and a breakdown of revenue by customer type to info@dawnconsultancy.com, call +971 55 441 1036, or request a call back. Related: Corporate Tax services, DMCC auditors, JAFZA auditors.