Maximising Tax Benefits for Free Zone Entities under UAE Corporate Tax Law

 | Updated on: November 21, 2024

If you’re running a business in one of the UAE’s Free Zones, you can enjoy perks like 100% foreign ownership and zero import duties—the dream scenario for any entrepreneur. What’s more, the UAE corporate tax law has mandated a 0% tax for all ventures established in the Free Zone area. The catch is that you have to meet all the criteria to be qualified as a free zone entity.

Knowing the critical aspects of UAE corporate tax law relating to Free Zone entities is a must to maximise your tax benefits as a free zone company. Let’s dive into some practical strategies to maximise the Free Zone tax perks.

Strategies for maximising tax benefits as a free zone entity

The key to leveraging UAE’s tax advantages is understanding what makes a “Qualifying Free Zone Person” (QFZP). This status is your ticket to a 0% tax rate on qualifying income, but it’s not automatic. Let’s clarify what you need to do—and avoid—to keep that status and reduce your tax liabilities as much as possible.

Know your qualifying income

In UAE Free Zones, not all income is created equal. Only certain types of revenue qualify for the 0% tax rate, which makes them highly beneficial for businesses. So, what is qualifying income? Broadly, it includes:

• Revenue from specific activities such as international trading (like exports outside the UAE).
• Transactions with other Free Zone entities.
• Income from high-sea sales.

Only these types of income will make you eligible for the 0% tax rate. If a chunk of your revenue comes from activities that don’t come under qualifying income, you could lose your QFZP status and face a corporate tax rate of 9%.

How this helps: By focusing your operations on generating qualifying income, you’re effectively “shielding” yourself from corporate tax. Stay informed on the types of income that keep your tax rate at zero, and your business will be on the right track to make a profit.

Know the transactions covered by Free Zone regulations

Free Zones are special economic areas with certain tax benefits; only specific transactions fall under their tax regulations. Specifically, transactions between Free Zone entities and international transactions can be classified as qualifying income if they align with Free Zone policies.

If your business mainly sells goods and services to mainland UAE, be cautious; this income generally doesn’t count towards the 0% tax rate. Free Zone companies often trade internationally or with other Free Zone entities to maintain their tax-friendly status.

How this helps: Sticking to transactions under Free Zone policies keeps your qualifying income intact, making it easier to retain your QFZP status and keep your corporate tax at 0%. This is the secret sauce that can keep tax worries off your plate.

Be aware of excluded activities

Not every business activity qualifies for the 0% tax rate, even in a Free Zone. Activities like leasing real estate within the mainland, banking, and insurance services don’t qualify for Free Zone tax benefits. If your business engages in any of these, your QFZP status could be at risk, leaving you open to corporate tax at the standard rate.

To stay on the safe side, ensure that your operations don’t stray into these “excluded activities.” For instance, if you own a logistics business, limit your services to Free Zone clients or international transactions rather than expanding into mainland UAE without the right strategy.

How this helps: By focusing only on permitted activities, you can keep your QFZP status and enjoy the benefits that come with it. Sticking to Free Zone-approved businesses means following the rules and maximising tax advantages.

Understand the De Minimis threshold

The De Minimis rule offers a small grace allowance for Free Zone companies. It allows you to have a limited non-qualifying income without losing your QFZP status. According to this rule, a Free Zone business can have non-qualifying income up to 5% of its total revenue or AED 5 million, whichever is lower.

However, here’s the catch: Exceeding this threshold means your income could be subject to a 9% corporate tax rate. So, keep a close eye on non-qualifying income sources and ensure they stay within the De Minimis limit.

How this helps: The De Minimis rule offers flexibility without compromising your QFZP status. By managing non-qualifying income effectively, you can safely maintain your 0% tax rate while keeping a diversified revenue stream.

Opt for exemption of revenue under the standard corporate tax rate

For some Free Zone businesses, opting for certain exemptions under the standard corporate tax rate can be advantageous. This approach is like choosing to “shelter” specific income categories by strategically applying the tax exemption option.

For instance, if your Free Zone entity has some revenue that falls outside qualifying income, but you don’t want to lose the QFZP status, you may exclude this income from the corporate tax framework entirely. This way, you’re not taxed on it and also avoid risking your QFZP status.

How this helps: By selecting exemptions wisely, you keep the lion’s share of your income tax-free while fully complying with UAE corporate tax law. This is a great tool to have in your tax planning toolkit.

The benefits of being a Qualifying Free Zone Person are substantial. While regular businesses pay a 9% corporate tax rate, QFZPs get to keep their qualifying income tax-free—a huge advantage in today’s competitive market. With the right strategies, your Free Zone business can maintain this status while growing in a compliant and profitable way.

Related Read: UAE Corporate Tax FAQs