UAE Corporate Tax: Basic Guide for Free Zone Persons

September 2024

The recent updates to the UAE Corporate Tax Law have introduced new requirements and considerations, particularly for entities classified as Free Zone Persons (FZPs). Understanding these nuances is essential for businesses looking to maximise their strategic advantages while ensuring compliance.

Who is considered a Free Zone Person (FZP)?

A Free Zone Person (FZP) refers to a legal entity that’s incorporated, established, or registered in a Free Zone. This includes relevant Free Zone authorities and government-controlled entities within the Free Zone.

Branches of non-resident legal entities registered in a Free Zone are also regarded as FZPs, with the parent company considered a Foreign Permanent Establishment. Similarly, if a UAE-resident legal entity has a branch in a Free Zone, the branch is classified as an FZP, while the parent company is considered a Domestic Permanent Establishment under the Corporate Tax Law.

It’s important to note that individuals (natural persons) or unincorporated partnerships do not qualify as FZPs.

What are the requirements for being a Qualifying Free Zone Person (QFZP)?

A FZP is generally treated as a Qualifying Free Zone Person (QFZP) unless they:

• fail to meet the required conditions for QFZP status; or
• opt to be subject to the standard corporate tax rules and rates.

To qualify as a QFZP, the following conditions must be met:

• The FZP must maintain sufficient substance within the Free Zone.
• The FZP must generate Qualifying Income.
• The FZP must not have opted for the standard corporate tax rate.
• The FZP must adhere to the arm’s length principle for transactions with related parties, including arrangements between the Free Zone parent and its Foreign or Domestic Permanent Establishments.
• The FZP must maintain proper transfer pricing documentation.
• The FZP must prepare audited financial statements.
• The FZP's non-qualifying revenue should not exceed the lesser of AED 5 million or 5% of its total revenue (the de minimis threshold). 

If a QFZP opts for standard corporate tax rules or fails to meet any of the above conditions, it will lose QFZP status from the beginning of the relevant tax period, plus an additional four tax periods.

What are the compliance requirements?

FZPs, including QFZPs, must adhere to the following corporate tax compliance requirements:

Tax registration

FZPs must register with the Federal Tax Authority (FTA) as per FTA Decision No. 3 of 2024. Non-compliance with registration deadlines will incur penalties.

Audited financial statements

Even with turnover below AED 50 million, QFZPs must prepare and maintain audited financial statements. Separate financial statements for Qualifying and non-Qualifying Income aren’t required, but sufficient documentation must be kept to justify how Qualifying Income was calculated.

Tax return and payment

FZPs, including QFZPs, are required to file their corporate tax return and make any necessary tax payments to the FTA within nine months following the relevant tax period.

Record keeping

FZPs must retain all relevant records and documents for a minimum of seven years after the end of the applicable tax period.

How can we help?

Meeting QFZP compliance requirements is crucial, especially in their first year of operation. Failure to meet these conditions can result in a disqualification from the 0% corporate tax rate for up to four years.

Our team is available to assist in determining eligibility for the 0% tax rate on Qualifying Income and can provide guidance on corporate tax compliance. For a confidential chat, please get in touch with Directors Mark Mallari (markmallari@rb-dubai.com) or John Donnelly (johndonnelly@rb-dubai.com).