Free zone companies can pay 0% corporate tax on qualifying income, but only if they meet every condition, every year, as a Qualifying Free Zone Person (QFZP). Failing one condition costs more than the year in question.
The conditions
- Adequate substance in the free zone: staff, premises and spending in line with the activity.
- Qualifying income from qualifying activities, such as manufacturing, trading in qualifying commodities, or many services to other free zone persons.
- No election to be taxed at the standard rates.
- Transfer pricing compliance, with documentation for related-party transactions.
- Audited financial statements.
- The de minimis test on non-qualifying revenue.
The de minimis test
Non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5 million in the tax period.
| Total revenue | 5% | Limit |
|---|---|---|
| AED 4 million | AED 200,000 | AED 200,000 |
| AED 50 million | AED 2.5 million | AED 2.5 million |
| AED 150 million | AED 7.5 million | AED 5 million |
What failing costs
A company that fails a condition loses QFZP status for that tax period and the following four. All its taxable income is then taxed at the standard rates: 0% up to AED 375,000 and 9% above.
What to do each year
- Track non-qualifying revenue monthly, not at year-end.
- Review new customers and contracts against the qualifying activity rules.
- Keep substance evidence: leases, payroll and board minutes.
Check your position with our free free zone 0% check.
Frequently asked questions
No. Small Business Relief is not available to a Qualifying Free Zone Person.
For the tax period of the failure and the following four tax periods.
