• Nov 10, 26
• dawnuser
• Free Zones & Company Setup
• 0 comment

Free zone companies relying on the 0% Corporate Tax rate are discovering that Qualifying Free Zone Person status is not a box on a form. It has to be supported, and audited financial statements are one of the conditions. For many free zone businesses this year is the first time an audit has been a tax question rather than a licensing one.

Why the audit matters now

A Qualifying Free Zone Person must meet every condition throughout the tax period, not at a single point. Audited financial statements are part of that. A company that cannot produce them does not get to apply the 0% rate to its Qualifying Income, whatever else is in place, and the income falls to be taxed at 9%.

What the auditor will be looking at

• Revenue split. Qualifying and non-qualifying income identified separately, with the basis documented rather than asserted
• De minimis position. Whether non-qualifying revenue stays within the permitted limits, calculated on the correct basis
• Substance. Evidence the core income-generating activity happens in the free zone, with the people and assets to support it
• Related-party transactions. Identified, priced on arm’s length terms and supported by transfer pricing documentation where required
• Permanent establishment risk. Whether mainland activity has created an exposure the accounts should reflect

Where the problems usually surface

Not in the audit fieldwork, but months earlier in how the books were kept. Revenue posted to a single account with no distinction between qualifying and non-qualifying streams cannot be split retrospectively with any credibility. Intercompany charges booked as round numbers with no agreement behind them are difficult to defend. Neither problem is fixable in audit season.

A checklist to work through before year end

• Chart of accounts set up to separate qualifying from non-qualifying revenue at the point of posting
• Customer contracts filed and matched to the revenue they generate
• Intercompany agreements in writing, with a basis for the pricing
• Substance documented: lease, staff, and where decisions are actually taken
• Prior year comparatives agreed, if this is your first audited set
• Deadline mapped backwards from your free zone’s filing date, not forwards from year end

The timing trap

Most free zones require audited accounts within a set window after the financial year end and will hold the licence renewal until they arrive. That deadline usually sits well before the Corporate Tax filing deadline, so the audit has to be planned around the earlier of the two, not the later.

Talk to us early

The cheapest version of this engagement starts before your year end, not after it. We audit free zone companies across DMCC, DAFZA, JAFZA, DSO and the other major zones. Call +971 55 441 1036 or email info@dawnconsultancy.com.