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UAE corporate tax applies a 9% rate to taxable income above a threshold, but a free zone company that meets the conditions of a Qualifying Free Zone Person can apply a 0% rate to qualifying income. Keeping that status depends heavily on the quality of the company's accounts: audited financial statements, a clear split between qualifying and non qualifying income, and transfer pricing documentation for related party dealings.
Key takeaways
- Qualifying free zone persons must maintain adequate substance and prepare audited financial statements.
- Income must be analysed into qualifying and non qualifying streams.
- Non qualifying revenue above the de minimis limit can cost the company its 0% status.
- Related party transactions must follow arm's length pricing and be documented.
What is a Qualifying Free Zone Person?
A Qualifying Free Zone Person is a free zone entity that maintains adequate substance in the free zone, earns qualifying income, complies with transfer pricing rules, prepares audited financial statements and has not elected to be taxed at the standard rate.
Why do free zone companies need audited IFRS financial statements?
Audited financial statements are a condition of qualifying status and the starting point for the corporate tax return. They must be prepared under IFRS (or IFRS for SMEs where permitted) and audited by a UAE licensed auditor.
WDS prepares IFRS financial statements and supporting schedules for free zone companies in Dubai, Abu Dhabi and Sharjah, ready for audit by a local firm.
How should qualifying and non qualifying income be separated?
The chart of accounts should tag revenue by customer type, location and activity so that qualifying income can be demonstrated. Revenue from mainland customers or excluded activities needs particular care.
- Tag revenue by customer, activity and location
- Track non qualifying revenue against the de minimis limit
- Keep contracts and invoices that support the classification
- Review the analysis at each quarter end, not only at year end
What transfer pricing records are needed?
Transactions with related parties and connected persons must be at arm's length. Depending on size, companies may need a transfer pricing disclosure form, a master file and a local file. Intra group service charges and loans are the most common areas of review.
How can WDS support UAE free zone companies?
We provide remote IFRS financial reporting, outsourced accounting and CFO support and audit readiness reviews. Statutory audits and tax filings are performed by UAE licensed firms and tax agents, with whom we coordinate.
Written by
Danish Abid, ACA
Founding Partner, Financial Reporting. Over 10 years of external audit experience with Deloitte and Nexia International in Pakistan and Qatar.
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