Testing Free-Zone Income Before Filing

A licence does not create the tax rate

A free-zone licence proves where the entity is registered. It does not, by itself, prove that every income line is Qualifying Income. The Federal Tax Authority describes 0% Corporate Tax as available to a Qualifying Free Zone Person on Qualifying Income. Taxable Income that does not meet that definition is treated separately. Start with the actual activity and contract, not the name of the zone on the licence. The rate follows the income tested, not the stationery on the licence.

The FTA Free Zone Persons guide lists the conditions that sit behind QFZP treatment. They include adequate substance in the UAE, Qualifying Income, the de minimis requirement, no election for the general Corporate Tax rules, transfer-pricing compliance and audited Financial Statements. The conditions belong to the entity and its Tax Period. A licence renewal is not evidence that those conditions were met.

If your return is ready and the only support for 0% is the trade licence, stop at that decision point. Pull the income ledger, customer list, contracts, staff and premises records into one review. The question is not whether the company operates in a free zone. It is which income the company can support as qualifying and what the remaining lines represent.

• Licence and registered activity.
• Income map by customer and contract.
• Substance and operating records.
• QFZP conditions tested together.

Separate income before applying 0%

Map revenue from the ledger to the transaction that produced it. Record the customer status, activity, place of performance, contract terms and accounting line. A single business can have income with different treatments. Combining every invoice into one free-zone total removes the fact that determines the rate and makes the return hard to defend. If the customer or activity cannot be identified, mark the line for review instead of guessing.

Worked example for the method: assume a QFZP has an adjusted taxable base of AED 1,000,000, made up of AED 700,000 of Qualifying Income and AED 300,000 that is not Qualifying Income. The calculation is AED 700,000 x 0% = AED 0, plus AED 300,000 x 9% = AED 27,000, giving AED 27,000 in this simplified illustration. The source classification still has to be proved.

This example isolates the rate question. It does not decide which expenses, exemptions or other adjustments belong in the tax computation. The FTA guide says a QFZP is subject to 0% on Qualifying Income and 9% on Taxable Income that is not Qualifying Income. Use the final adjusted base, then document why each component sits in its chosen category.

• Customer status checked.
• Activity matched to the contract.
• Qualifying and other income separated.
• Calculation kept with the classification.

The de minimis test uses the ledger

The FTA guide describes the de minimis requirement as a comparison of non-qualifying Revenue with the lower of AED 5,000,000 or 5% of total Revenue. The calculation uses Revenue categories, not a general impression that the non-qualifying work is small. Build the numerator and denominator from the ledger and preserve the exclusions used in the working. A threshold calculation without the ledger split is only an assertion.

The customer file and contract should explain why a transaction was classified as qualifying or non-qualifying. The premises file, staffing record and operating evidence support the substance question. The related-party schedule and pricing work support the transfer-pricing condition. Keep those objects beside the calculation so the reviewer can see why the status was claimed.

A table helps here because the review asks the same questions for each income stream. It should not replace the judgment. If one contract includes several services, split the analysis only where the contract, work performed and ledger can support the split. A neat allocation without those objects is still an unsupported conclusion.

The return must carry the income trail

For each material income stream, retain the signed contract, invoice trail, customer details and a short explanation of the activity. Add the ledger account and the working that places the line in Qualifying Income or another category. If the classification depends on where people worked, keep the relevant lease, staffing and operating records. Evidence should explain the fact, not merely repeat the answer.

The FTA guide says a Free Zone Person must prepare and maintain audited Financial Statements for the purposes of the Corporate Tax Law, regardless of the amount of Revenue it earns. That is a QFZP condition, not a request to call Exiloz a statutory audit firm. Arrange the audit with an appropriate auditor where the rule applies, and keep the audited statements with the tax working. Tax review support and statutory audit are separate engagements.

Do not wait for a reviewer to discover that the income ledger cannot be separated. Ask the accounting team to preserve the classification at source, then reconcile the map to the return. When the customer, contract, activity and ledger tell the same story, the 0% claim has a factual basis. When they do not, mark the line for a decision.

• Signed contracts and invoice trail.
• Customer and activity evidence.
• Substance and staffing records.
• Audited Financial Statements where required.

Do not claim 0% without the file

We would not apply 0% to an income line until the contract and customer evidence support the activity, because the rate follows the nature of the income rather than the colour of the licence. That position may move a line into the 9% computation. It is still better than defending a broad 0% claim that the ledger and operating records cannot explain. The mistake we see most is treating the zone name as evidence of every customer and service classification.

The FTA Free Zone Persons guide explains the categories, conditions and examples, but it does not prescribe an allocation formula for every bundled contract containing more than one service. That is a genuine boundary of the published guidance. For a mixed contract, retain the signed scope, delivery records, pricing basis and ledger split, then state the judgment used in the return working.

Address the decision while correction is still possible. If you cannot show why an income line qualifies, send the contract, invoice sample, customer record and income map for review. If the evidence supports the claim, file it with the working. If it does not, record the alternative treatment and the reason for choosing it.

• Licence not treated as the rate test.
• Mixed contracts flagged for judgment.
• 0% claim tied to source objects.
• Alternative treatment recorded when needed.