The UAE’s free zones have long been a cornerstone for businesses seeking tax efficiency and operational flexibility. With the introduction of the federal corporate tax in 2023, understanding the distinction between qualifying and non-qualifying income has become crucial for companies operating in free zones. This ensures they can retain 0% corporate tax benefits while remaining compliant with Federal Decree-Law No. 47 of 2022 and related regulations.
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What are Free Zone Companies in the UAE?
Free zone companies are entities registered in one of the UAE’s Free Zone jurisdictions (such as Jebel Ali Free Zone (JAFZA), Dubai Multi Commodities Centre (DMCC), or Abu Dhabi Global Market (ADGM).). These companies traditionally enjoyed:
- 100% foreign ownership
- Full repatriation of profits
- Tax incentives, including corporate tax holidays or 0% rates
Under the new corporate tax framework, free zone companies may continue to enjoy 0% corporate tax on qualifying income if they meet specific criteria.
Qualifying Income for Free Zone Tax Benefits
To benefit from 0% corporate tax, a free zone entity must be a Qualifying Free Zone Person (QFZP) and earn qualifying income.
Additional requirements include:
- Maintaining economic substance (employees, offices, and operational activities in the UAE)
- Proper transfer pricing documentation
- Compliance with the QFZP eligibility criteria set by the free zone authority and FTA
Companies that meet these conditions can retain the 0% corporate tax rate, even under the federal corporate tax regime.
Non-Qualifying Income
Non-qualifying income is any income that does not meet the conditions for free zone tax benefits, including:
- Income from mainland UAE business activities
- Income earned outside the approved scope of free zone activities
- Transactions that fail economic substance requirements
- Income from related party transactions that do not meet transfer pricing rules
Non-qualifying income is subject to the standard UAE corporate tax rate of 9%.
Key Compliance Requirements
To ensure free zone tax benefits, companies must:
- Register with the Federal Tax Authority (FTA)
- Submit annual corporate tax returns
- Maintain accurate books and records demonstrating income classification
- Ensure substance compliance (staff, office, and operational presence in the free zone)
- Monitor related party transactions and transfer pricing
Failure to comply may invalidate 0% tax benefits, resulting in the application of the 9% corporate tax rate on non-qualifying income.
Key Takeaways for Free Zone Companies
- Only income meeting QFZP and qualifying conditions benefits from 0% corporate tax
- Non-qualifying income is taxed at the standard rate of 9%
- Compliance with economic substance, transfer pricing, and reporting requirements is mandatory
- Accurate accounting and FTA registration are critical to preserve tax benefits
