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Understanding Free Zone Persons and Corporate Tax in the UAE

The UAE’s Corporate Tax Law provides unique tax advantages for businesses operating in Free Zones. A Free Zone Person can benefit from a 0% Corporate Tax rate on qualifying income, making Free Zones an attractive destination for both local and international companies.

This article will explore the conditions, qualifying criteria, and compliance requirements for Free Zone Persons to ensure you fully understand the tax advantages and how to remain compliant under the UAE Corporate Tax Law.

Who is Considered a Free Zone Person?

A Free Zone Person is any juridical entity established, incorporated, or registered in a UAE Free Zone. This includes Free Zone authorities and Government-Controlled Entities operating within Free Zones. If a non-resident company operates a branch in a Free Zone, it is also treated as a Free Zone Person, while the parent company is classified as a Foreign Permanent Establishment. Additionally, a UAE-based company with a Free Zone branch is considered a Free Zone Person, and the parent company is classified as a Domestic Permanent Establishment. However, individuals (natural persons) and Unincorporated Partnerships are not classified as Free Zone Persons.

What is a Free Zone for Corporate Tax Purposes?

A Free Zone for corporate tax purposes is a specifically designated geographic area within the UAE that enjoys preferential tax treatment. These zones are determined by Cabinet Decisions based on recommendations from the Minister.
For VAT purposes, Designated Zones, under Federal Decree-Law No. 8 of 2017, are considered Free Zones. Businesses should consult their Free Zone Authority to confirm their Free Zone status for Corporate Tax purposes.

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What is a Free Zone for Corporate Tax Purposes?

A Free Zone for corporate tax purposes is a specifically designated geographic area within the UAE that enjoys preferential tax treatment. These zones are determined by Cabinet Decisions based on recommendations from the Minister.
For VAT purposes, Designated Zones, under Federal Decree-Law No. 8 of 2017, are considered Free Zones. Businesses should consult their Free Zone Authority to confirm their Free Zone status for Corporate Tax purposes.

Conditions to Qualify as a Free Zone Person

To benefit from the 0% Corporate Tax rate, a Free Zone Person must meet several key conditions:

  • Maintain adequate substance within the Free Zone,  
  • Earn Qualifying Income from approved activities,
  • Avoid opting into the standard Corporate Tax regime
  • Comply with the arm’s length principle for transactions with Related Parties
  • Maintain accurate Transfer Pricing documentation
  • Prepare and submit audited financial statements
  • Ensure that non-qualifying income does not exceed AED 5 million or 5% of total revenue.

Failure to meet these conditions could result in the loss of Qualifying Free Zone Person status, resulting in the imposition of the standard 9% Corporate Tax

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What is Qualifying Income for Free Zone Persons?

The 0% Corporate Tax rate applies to a Free Zone Person’s Qualifying Income, which typically includes:

  • Transactions with other Free Zone Persons
  • Qualifying Activities such as manufacturing, trading, or logistics
  • Income from Qualifying Intellectual Property
  • Income derived from holding and managing shares or securities for investment purposes.

Income from non-qualifying activities such as those related to Immovable Property, Permanent Establishments, or specific Excluded Activities is subject to the standard 9% Corporate Tax.

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What Are Qualifying Activities for Free Zone Persons?

To benefit from the 0% Corporate Tax rate, Free Zone Persons must engage in Qualifying Activities, which include:

  • Manufacturing and processing of goods
  • Trading in Qualifying Commodities
  • Ship management and operations
  • Fund management and reinsurance services
  • Wealth and investment management
  • Financing and leasing of aircraft
  • Logistics services within Free Zones

These activities must directly contribute to the Free Zone’s economic environment to qualify for the tax exemption.

Compliance Requirements for Free Zone Persons

Maintaining compliance under the UAE Corporate Tax Law is essential for Free Zone Persons. Key requirements include:

  • Tax registration with the Federal Tax Authority (FTA)
  • Submission of audited financial statements
  • Filing a corporate tax return within nine months of the tax period’s end
  • Keeping all relevant documentation and records for at least 7 years

Failure to meet these requirements could result in penalties or loss of preferential tax status.

Have A Questions?

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Frequently Asked Questions

A Free Zone Person is a juridical entity incorporated, established, or registered within a UAE Free Zone. This can include branches of non-resident companies and UAE-based businesses with Free Zone branches.

A Qualifying Free Zone Person benefits from a 0% Corporate Tax rate on their Qualifying Income, while non-qualifying income is taxed at the standard rate of 9%.

Qualifying Activities include manufacturing, trading, fund management, logistics services, and reinsurance among others.

If a Free Zone Person fails to meet the qualifying conditions, they will lose their 0% tax status and be subject to the standard 9% Corporate Tax rate for at least the following four tax periods.

Qualifying Income includes transactions with other Free Zone Persons, revenue from Qualifying Activities, and income derived from the ownership of Qualifying Intellectual Property.

No, only Designated Zones or those listed in the Cabinet Decision are treated as Free Zones for corporate tax purposes. Businesses should verify their status with their Free Zone Authority.

Yes, Free Zone Persons can opt to be taxed at the standard 9% rate, but they will lose their eligibility for the 0% Corporate Tax rate.

Yes, Free Zone Persons must register with the FTA, file audited financial statements, and submit their tax returns on time. They must also maintain records for at least 7 years.

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