Free Zone Entities and Corporate Tax — Clarifications and Compliance Priorities

Overview: Free zones remain a cornerstone of the UAE’s economic ecosystem, offering significant incentives for foreign and regional investors. However, with the implementation of the corporate tax regime, the conditions for maintaining 0% taxation have become more clearly defined. Understanding these rules is critical for businesses operating within or transacting with free zones.

Qualifying and Non-Qualifying Income

• Qualifying income typically includes transactions with foreign entities or other free zone businesses engaged in qualifying activities.
• Non-qualifying income includes mainland-sourced revenues that do not meet the regulatory conditions.
• Entities must maintain separate books for qualifying and non-qualifying transactions to avoid disqualification from the 0% rate.

Compliance Conditions

• Maintain substance within the free zone — real presence, management, and control.
• Adhere to transfer pricing and arm’s length principles for all related-party dealings.
• Ensure audited financial statements are prepared and retained as per FTA requirements.
• File corporate tax returns on time and disclose income classifications accurately.

Strategic Impact

The new rules require businesses to revisit their operating models and supply chains. Many groups are now restructuring intercompany arrangements to balance tax efficiency with compliance. Proper documentation and proactive engagement with regulators are essential to sustain the benefits of free zone incentives.

How Univia Can Help

Univia Global Consultancy provides expert guidance for free zone entities navigating the UAE’s corporate tax environment. Our specialists assist with classification, structuring, and compliance to help maintain eligibility while aligning with Economic Substance Regulations (ESR) and transfer pricing obligations.