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UAE Free Zone Corporate Tax
Cabinet Decision No. 55 of 2023: Qualifying Free Zone Person (QFZP) rules.
UAE Corporate Tax and VAT: Guide to Qualifying Free Zone Income Rules
The UAE Corporate Tax Law provides a 0% preferential tax rate for Qualifying Free Zone Persons. However, qualifying requires meeting strict regulatory conditions. Learn the fundamentals of Free Zone taxation.
1. The Framework of UAE Corporate Tax Law
Effective June 1, 2023, the UAE introduced a federal Corporate Tax rate of 9% on taxable business profits exceeding AED 375,000. Profits up to this threshold are taxed at 0% to support startups and small businesses. Businesses operating in the UAE must register with the Federal Tax Authority (FTA) and obtain a Tax Registration Number (TRN) to file annual returns.
2. Defining the Qualifying Free Zone Person (QFZP) Status
Free Zone companies can benefit from a 0% tax rate on qualifying income if they maintain QFZP status. To qualify, a Free Zone company must maintain adequate substance in the UAE (local offices, local assets, qualified employees), generate Qualifying Income, prepare audited financial statements, and comply with Transfer Pricing rules. Failing to meet even one of these criteria revokes the QFZP status.
3. Differentiating Qualifying and Non-Qualifying Income
Qualifying Income taxed at 0% includes transactions with other Free Zone entities (except for excluded activities) and transactions with foreign entities. Non-qualifying income (taxed at 9%) includes transactions with mainland UAE entities, income from retail, and real estate transactions with mainland companies. Maintaining a clean split between these income streams is critical for compliance.
4. The de minimis Threshold Rule for Non-Qualifying Income
To protect Free Zone entities from losing their 0% tax status due to small mainland transactions, the law features a de minimis threshold. Non-qualifying revenue must not exceed 5% of the total revenue or AED 5 million (whichever is lower). If a company's non-qualifying mainland sales exceed this de minimis limit, the entire entity loses its tax exemption and is taxed at 9%.
5. Implementing a Free Zone Eligibility Checker Tool
An interactive Free Zone checker tool guides business owners through substance requirements, income categories, and de minimis math. By analyzing the entered numbers, the tool calculates whether the entity qualifies for QFZP status or if it faces mainland tax rates, helping business owners make informed structuring decisions.