A client runs a company in a UAE free zone and assumes it pays no tax. How would you advise them?
What the interviewer wants to hear
- Free zone companies are within UAE corporate tax and must register and file
- Qualifying Free Zone Person status gives 0% on qualifying income
- Conditions: substance, audited accounts, transfer pricing, de minimis
- Non-qualifying income taxed at 9% and risks of losing status
- VAT is separate and generally still applies
Model answer
I would first correct the assumption. Free zone companies are within the UAE corporate tax regime, so they must register, keep proper records and file returns. They can be taxed at 0% on qualifying income only if they are a Qualifying Free Zone Person, which requires adequate substance in the free zone, audited financial statements, compliance with transfer pricing rules, not electing to be taxed at the standard rate, and meeting the de minimis test on non-qualifying revenue. I would review their revenue streams to see which count as qualifying, for example certain activities and transactions with other free zone persons, and which do not, such as many sales to mainland customers. Non-qualifying income is taxed at 9%, and failing the conditions can mean losing the status for several years. I would also remind them that VAT is separate: most free zones are not designated zones for VAT, so normal VAT rules generally still apply.
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