Qualifying Free Zone Person: When a Free Zone Company Pays 0% and When It Pays 9%

A free zone licence does not mean 0% Corporate Tax. The 0% rate belongs to a Qualifying Free Zone Person (QFZP), and a company has to earn that status every tax period. This article follows the Federal Tax Authority (FTA) guide to free zone persons, published in May 2024, and explains the conditions, the two rates and the consequences of failing. Check the FTA site for newer guidance before you act.

The two rates

If a free zone person meets all the conditions, including the de minimis requirements, the guide says it is taxed at these rates:

• 0% on its Qualifying Income.
• 9% on its Taxable Income that is not Qualifying Income.

Being a QFZP also costs you something. The guide states that a QFZP is not eligible for the 0% standard rate on Taxable Income up to AED 375,000 that other companies get. It also loses reliefs such as Small Business Relief and the Tax Group regime.

The conditions

The guide sets out conditions that must all be met in a tax period. In short:

1. Adequate substance. The company must carry out its core income generating activities in a free zone, with enough assets, staff and spending there.
2. Qualifying Income. The company must derive qualifying income, described below.
3. No election. The company must not have elected to be taxed under the standard rules.
4. Arm's length dealing. Transactions with related parties must be at arm's length, and the company must keep transfer pricing documentation.
5. Audited financial statements. These are required whatever the level of revenue.
6. The de minimis limit. Non qualifying revenue must stay under the limit set out below.

What counts as qualifying income

The guide says the company must derive Qualifying Income from one or more of these sources:

• Transactions with other free zone persons, where those persons are the beneficial recipient and the transactions do not relate to excluded activities.
• Transactions relating to qualifying activities that are not excluded activities.
• Income from the ownership or exploitation of qualifying intellectual property.
• Other income, provided the company meets the de minimis requirements.

The lists of qualifying and excluded activities are set by separate decisions, and they decide whether your business model fits. Ask for a review of your activity against those lists before you pick a zone for the tax result.

The de minimis limit

The de minimis requirement is met when non qualifying revenue does not exceed the lower of AED 5,000,000 or 5% of total revenue. The lower figure applies, so for most small companies the 5% test is the one that bites.

The guide gives a worked example. Company E has total revenue of AED 7,000,000 for the test and AED 200,000 of non qualifying revenue from excluded activities with free zone persons. That is 2.86% of total revenue, within the 5% limit and under AED 5,000,000, so it meets the requirement and may benefit from the 0% rate if it meets the other conditions.

What happens if you fail

The guide says that if the de minimis requirements are not met, the company is not a QFZP and is subject to the standard Corporate Tax rules and rates from the start of that tax period and for the four tax periods after it. In its second example, a company that exceeded the 5% limit would be subject to the standard rules on the entirety of its taxable income, including the part that was under the limit.

The same four period consequence applies if the company elects out of QFZP status, or fails to meet the criteria. One bad year can therefore cost five years of the 0% rate.

What to check before you rely on 0%

1. Map every revenue stream to a source in the qualifying income list, and flag any that are with customers outside the free zone.
2. Estimate non qualifying revenue as a share of total revenue for the first full tax period.
3. Confirm where the people, assets and spending that earn the income are located. A licence alone does not show it.
4. Budget for an audit from the first year, since the guide requires audited statements regardless of revenue.
5. Keep related party pricing documentation from the start.

DBC packages start from USD 1,948 (AED 7,150). See /pricing or /pricing/calculator. If you also owe tax in the country where you live, that country's rules apply to you separately, and you need advice there.

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