Corporate Tax and Free Zones in the UAE

What Is Corporate Tax for Free Zones?

Corporate Tax applies to companies operating in free zones under special rules that may differ from some rules applicable to mainland companies.

Certain free zone companies may benefit from preferential tax treatment if the legal conditions and compliance requirements are met.

Qualifying Free Zone Person

A Qualifying Free Zone Person is a person that satisfies the conditions required to benefit from the special Corporate Tax treatment available to eligible free zone businesses.

This does not depend only on the company being located in a free zone. It depends on a number of ongoing conditions and requirements.

Conditions of a Qualifying Free Zone Person

• Maintaining adequate substance in the free zone.
• Deriving qualifying income under the applicable rules.
• Complying with transfer pricing requirements.
• Complying with related party requirements.
• Preparing and maintaining required records and documents.
• Continuing to satisfy the legal conditions on an ongoing basis.

Qualifying Income

Determining qualifying income is one of the most important issues for Corporate Tax in free zones.

The tax treatment may differ depending on the nature of the activity, type of customer, nature of the transaction, and source of income.

Therefore, determining whether income is qualifying income requires a detailed review of the transaction and should not be based only on a general description of the business activity.

Non-Qualifying Income

Earning non-qualifying income may have important tax consequences for the company.

Transactions and revenue streams should be reviewed periodically to ensure correct classification and to identify potential tax risks.

Related Parties

Related party transactions are important for free zone companies under the Corporate Tax regime.

• Group companies.
• Subsidiaries.
• Owners and shareholders.
• Connected persons.

These transactions should be properly documented, and supporting documents should be maintained.

Transfer Pricing

Certain transactions may be subject to transfer pricing requirements under the rules applicable in the UAE.

These requirements include reviewing transactions between related parties and ensuring that they are consistent with the arm’s length principle.

Substance in the Free Zone

Maintaining certain tax benefits may require adequate business substance inside the free zone.

• Employees.
• Office premises.
• Management.
• Operational activities.
• Records and documents.

Corporate Tax Services for Free Zones

Corporate Tax Registration

• Reviewing the company’s tax position.
• Reviewing business activities.
• Corporate Tax registration.
• Following up registration procedures.

Qualifying Free Zone Person Review

• Reviewing whether the company satisfies QFZP conditions.
• Reviewing activities and revenue streams.
• Reviewing potential tax risks.

Qualifying Income Review

• Reviewing revenue streams.
• Classifying income.
• Reviewing customers and transactions.

Related Party Review

• Analyzing related party transactions.
• Reviewing supporting documents.
• Identifying potential tax risks.

Transfer Pricing

• Reviewing transfer pricing obligations.
• Preparing required documentation.
• Evaluating related party transactions.

Corporate Tax Return

• Preparing the Corporate Tax return.
• Reviewing accounts.
• Reviewing taxable income.

Tax Audit Support

• Preparing tax audit files.
• Reviewing records.
• Providing support during tax audits.

Tax Issue Resolution

• Loss of Qualifying Free Zone Person conditions.
• Non-qualifying income.
• Income classification errors.
• Related party issues.
• Transfer pricing issues.
• Penalties and violations.

Common Corporate Tax Mistakes for Free Zone Companies

• Assuming that all free zone companies are exempt from Corporate Tax.
• Assuming that all revenue is qualifying income.
• Not reviewing related party transactions.
• Ignoring transfer pricing requirements.
• Not maintaining supporting documents.
• Relying only on the trade licence without reviewing the nature of revenue.
• Not following tax updates and compliance requirements.

Required Records and Documents

• Financial statements.
• Accounting records.
• Contracts and agreements.
• Revenue records.
• Expense records.
• Related party files.
• Transfer pricing documents.
• Records supporting business activities.

Tax Audit for Free Zone Companies

The Federal Tax Authority may review Qualifying Free Zone Person conditions, nature of income, accounting records, related party transactions, transfer pricing requirements, and supporting documents.

Proper preparation of records and supporting documents helps reduce risks and present the company’s tax position clearly.

Tax Penalties and Violations

Penalties may arise due to late registration, errors in Corporate Tax returns, failure to maintain records, or non-compliance with related party and transfer pricing requirements.

How Can We Help?

We assist Free Zone businesses in assessing Qualifying Free Zone Person requirements, reviewing qualifying and non-qualifying income, evaluating tax risks, and maintaining compliance with UAE Free Zone Corporate Tax requirements.

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