UAE Free Zones attract businesses worldwide with their tax perks, streamlined setups, and strategic locations. But with corporate tax now in play, smart planning keeps your profits intact. At Prema Consulting, we help Free Zone firms lock in the coveted 0% rate while dodging the 9% pitfall. Let’s dive into practical corporate tax planning strategies that actually work.
Grasping UAE Corporate Tax for Free Zones
UAE rolled out corporate tax in June 2023, 9% on profits above AED 375,000. Free Zone companies can snag 0% on “qualifying income” if they qualify as a Qualifying Free Zone Person (QFZP). Miss the mark, and you pay 9% across the board for five years.
Everyone files returns by nine months after year-end and keeps records for seven years. Small firms get relief on the first AED 3 million of revenue until end-2026. The key? Proactive corporate tax planning from day one.
Becoming a Qualifying Free Zone Person
To earn QFZP status, tick these boxes: set up in an approved Free Zone, show “adequate substance,” earn mostly qualifying income, skip the mainland tax election, nail transfer pricing, stay under de minimis limits, and audit using IFRS standards.
Substance means doing your core work in the Zone—think local employees, assets, spending, and decisions. Outsource only to Zone-based providers, or UAE firms for IP stuff. Fail once, lose status for five years, then reapply.
Here’s what strong substance looks like:
- Hire skilled staff right in the Free Zone office.
- Hold board meetings locally with minutes to prove it.
- Keep enough operating costs in the Zone (at least 50% for audits).
What Counts as Qualifying Income?
Qualifying income gets the 0% treatment. It includes deals between Free Zone entities (minus excluded activities), qualifying services to mainland UAE firms, IP income from approved setups, and a bit of “de minimis” non-qualifying stuff.
Non-qualifying? Transactions with individuals, most finance services, or mainland property deals. Qualifying activities cover manufacturing, trading commodities, holding investments, shipping, logistics in Designated Zones like Jebel Ali, and support services.
Examples:
- Export manufacturing from DMCC—qualifies fully.
- Consulting for another Free Zone firm—0% tax.
- Local sales to Dubai mainland retailer—qualifies if it’s a listed activity.
Mastering the De Minimis Rule
Even QFZPs can earn some non-qualifying revenue without penalty—up to 5% of total revenue or AED 5 million, whichever is lower. Skip property rentals or certain IP from this calculation.
Track this monthly. If you creep close, shift those deals to a mainland sister company. Domestic branches (PEs) pay 9% separately but don’t ruin your QFZP status.
Common pitfalls:
- Overlooking individual client sales.
- Banking or insurance arms triggering exclusions.
- Weak documentation during FTA audits.
Top Corporate Tax Planning Strategies
Corporate tax planning shines when you structure smartly. Here’s how Free Zone firms maximize the 0% benefit.
- Prioritize Qualifying Streams: Focus sales on exports, inter-Free Zone trade, or listed activities. Use Designated Zones for logistics to supercharge perks.
- Build Ironclad Substance: Invest in local hires (not just nominal), lease Zone space, and log all decisions. Document outsourcing oversight rigorously.
- Perfect Transfer Pricing: Price related-party deals at arm’s length. Prep master files if group revenue tops AED 3.15 billion; local files for AED 200 million+. Benchmark against real comparables.
- Restructure Groups Wisely: Move assets tax-free within 75%-owned groups for legit reasons like efficiency. Avoid sham moves—FTA spots them.
- Harvest Tax Reliefs: Claim small business exemptions pre-2027. Deduct R&D, training, or donations fully.
- Isolate Risks: Spin off non-qualifying ops to mainland entities. Monitor de minimis like a hawk.
Tackling Transfer Pricing Head-On
UAE mandates arm’s length for all related deals, QFZP or not. Disclose in returns; face penalties for gaps. Dubai firms often centralize procurement or IP in Free Zones to leverage this.
Steps to comply:
- Draft annual TP policies.
- Run comparability studies quarterly.
- Train teams on documentation.
Get it wrong, and audits adjust profits upward, slapping 9% plus interest.
Compliance Checklist for Success
Nail corporate tax planning with these habits:
- Register on FTA portal ASAP.
- File with full computations, TP disclosures, and IFRS audits.
- Retain invoices, contracts, payrolls—everything—for seven years.
- Review annually for FTA updates (latest guide clarifies PEs and hybrids).
- Outsource audits if revenue hits AED 50 million. Pros spot issues early.
Advanced Plays for Growth
Scale up? Layer in holding companies for investments, qualifying if passive. For multinationals, use UAE as a tax-efficient hub, but align with global substance rules like OECD pillars.
Watch 2026 changes: Potential tweaks to de minimis or Designated Zones. Stay ahead with expert input.
Corporate tax planning turns UAE Free Zone advantages into real bottom-line wins. Prema Consulting crafts bespoke strategies from substance audits to TP mastery for firms aiming to hold that 0% rate long-term. We’ve guided dozens through setups, filings, and optimizations, ensuring compliance without complexity.
Ready to safeguard your profits? Contact us today. Let’s chat about your Free Zone setup and build a tax plan that fuels your growth.
