One of the common misconceptions around UAE Corporate Tax is that businesses registered in a Free Zone are automatically subject to a 0% tax rate.
That is not the case.
A Free Zone business can benefit from the 0% Corporate Tax rate on Qualifying Income if it meets the conditions to be treated as a Qualifying Free Zone Person (QFZP). Income that does not qualify may be subject to the standard 9% Corporate Tax rate.
What determines whether the 0% rate applies?
Free Zone status is only the starting point. The business needs to meet a number of conditions under the Corporate Tax rules.
These include requirements relating to:
- The activities carried out by the business
- The nature of its income
- Maintaining adequate substance in the UAE
- Compliance with the applicable transfer pricing requirements
- Maintaining appropriate financial and tax records
The rules also distinguish between Qualifying Activities and activities that are specifically excluded.
This means that two businesses operating from the same Free Zone may not necessarily have the same Corporate Tax treatment.
Is all income of a Free Zone company taxed at 0%?
No.
The 0% rate applies to Qualifying Income, rather than automatically applying to everything a Free Zone business earns.
The nature of the transaction, the activity generating the income and, in certain cases, who the customer is can all be relevant when determining whether income qualifies.
This is particularly important for businesses that have several types of activities or deal with both UAE and overseas customers.
What should Free Zone businesses do?
Rather than assuming that the Free Zone registration itself provides a tax benefit, businesses should review their activities and income and understand how they fit within the Corporate Tax rules.
They should also ensure that their accounting records clearly support the position taken for Corporate Tax purposes.
Importantly, Free Zone businesses are still required to register for UAE Corporate Tax, even where they expect to benefit from the 0% rate on qualifying income.
The key takeaway
Being established in a Free Zone does not, by itself, mean that a business is exempt from Corporate Tax.
The 0% rate is available to businesses that meet the requirements for Qualifying Free Zone Person status and only applies to income that falls within the qualifying rules.
For Free Zone businesses, getting the classification and supporting records right from the outset can make Corporate Tax compliance much more straightforward.
E Craft Global provides Corporate Tax advisory and compliance support to businesses in the UAE, including assistance with assessing Free Zone Corporate Tax positions and ongoing compliance requirements.
