FTA has released the long-awaited Corporate Tax in UAE guide on Free Zones.

We are highlighting below some key points from the guide. The guide is available in the FTA website. 


Free Zone Persons: 

  • All Free zones do not by default fall under the Free Zone Corporate Tax Regime. Taxpayers are required to check with their respective Free Zone Authority to confirm if they operate in a Free Zone or Designated Zone for Corporate Tax purposes. 
  • A Free Zone Person will be deemed to be a Qualifying Free Zone Person (QFZP) unless one of the conditions to be a QFZP is not met, or if the QFZP makes an election to be subject to tax.
  • A Qualifying Free Zone Person (QFZP) that elects to be subject to the standard Corporate Tax rules and rates or that fails to meet the criteria to be a QFZP for a certain Tax Period will cease to be a QFZP from the beginning of the Tax Period for which it elects to be subject to Corporate Tax or in which it fails to meet the criteria to be a QFZP, and the four subsequent Tax Periods.

Qualifying Income:

  • For meeting the “Beneficial Recipient” condition in the case of transactions with Free Zones, the seller or service provider may rely on a written statement or undertaking from the purchaser confirming that the purchaser is the “Beneficial Recipient”.
  • In the case of startups even if the company does not earn any qualifying income in the tax period because it has not yet started earning revenue, it will not be disqualified from being a QFZP, provided it does not derive any non-qualifying Revenue and complies with all other requirements prescribed by the Corporate Tax Law.

Substance Requirements:

  • The Free Zone Person must perform core income-generating activities in relation to each Qualifying Activity in the Free Zone, otherwise the Free Zone Person cannot be a QFZP. Core income-generating activities will require separate substance per core income generating activity.
  • Activities performed through a Domestic Permanent Establishment would not be taken into consideration in assessing whether a Free Zone Person has adequate substance in relation to its Free Zone parent. Adequate substance is assessed by reviewing whether the assets, employees and operations of the Free Zone parent are adequate to perform the core income-generating activities of the Free Zone parent.
  • Determining what constitutes adequate substance will depend on the nature and size of the Business that the Free Zone Person is conducting. This would need to be determined on a case-by-case basis and take into consideration all facts and circumstances. 

Generally, to assess substance, the Free Zone Person should: 

• Identify the core income-generating activities related to the relevant business that it performs to derive Qualifying Income. 

• Identify the assets, employees and operational costs associated with each core income-generating activity. 

• Evaluate whether those assets, employees, and operational costs are consistent with the nature, size and Revenue of the activities and transactions generating Qualifying Income conducted in the Free Zone.

  • Double counting of employees overseeing two activities not allowed for substance purposes.

Qualifying Activities:

  • Qualifying Activities also include ancillary activities which are necessary for the performance of the main Qualifying Activity or that make a minor contribution to the main Qualifying Activity and are so closely related to the main Qualifying Activity that it should not be regarded as a separate activity.  At the same time performing a solitary activity may not constitute a Qualifying Activity unless that activity forms a natural and integral part of a coherent business that the Free Zone Person performs in relation to that and other Qualifying Activities.
  • Investment of surplus funds cannot be considered as an ancillary activity. The investment would either need to be a Qualifying Activity in its own right (for example, treasury and financing services to Related Parties, which includes oneself) or the income from the investment would be non-qualifying Revenue for purposes of the de minimis requirements.
  • Third port shipments / High Sea sales would be considered as Qualifying Activities of Distribution, provided such activities are conducted in or from a Designated Zone. A key feature of a distribution activity is that the distributor holds title to the products.
  • For meeting the “retailer/reseller” clause for Qualifying Activities of Distribution, the distributor may rely on a written statement or undertaking from the purchaser confirming that they are retailers / resellers and not end-users. 
  • Distribution of goods to retailers in the UAE (import) by a Designated Free Zone Person, has to be imported through a Designed Zone in order to be considered as Qualifying Activity.
  • Distribution of goods from the UAE (export) to retailors outside UAE by a Designated Free Zone Person need not pass through a Designated Zone to be considered as Qualifying Activity as the goods were already in the UAE at the time of purchase.
  • Distribution of goods within the UAE to retailers by a Designated Free Zone Person, need not pass through a Designated Zone to be considered as Qualifying Activity as the goods were already in the UAE at the time of purchase.

The guide provides insights into many other areas such as Qualifying Intellectual activity, clarification on expense allocation, mixed use of property etc.

Taxpayers are advised to go through the same to have a better understanding of the law.



The guide is not a legally binding document but is intended to provide assistance in understanding the tax implications of FZP’s under the UAE CT regime. While we have made every effort to ensure the accuracy and reliability of the information presented, tax laws and regulations are subject to change and interpretation. We do not assume any liability for actions taken /not taken based on the information provided in this update. Our update is not binding on any regulators and there can be no assurance that the regulators will not take a position contrary to our comments. We do not take any responsibility with regard to any different view/approach taken by the UAE Federal Tax Authority.