Debunking Common Misconceptions About Corporate Tax for UAE Free Zone Companies
As the UAE rolls out its corporate tax framework, we at Zyla Accountants your trusted FTA-registered tax agents, have noticed a growing number of myths circulating among free zone businesses.
These misunderstandings could easily lead to non-compliance or missed opportunities. In this blog, we clarify 11 of the most common misconceptions.
1. “We’re in a Free Zone—So No Corporate Tax for Us!”
The Truth: Being in a free zone doesn't grant automatic exemption from corporate tax. While qualifying free zone persons can benefit from a 0% rate on certain income, this only applies if six specific conditions laid out by the FTA are met.
2. “Free Zone Companies Don’t Need to Register or File Corporate Tax Returns”
The Truth: All businesses in UAE free zones must register for corporate tax and file returns—regardless of whether they qualify for the 0% rate. Returns are due within 9 months from the end of the relevant financial year.
3. “Zero Tax is Automatic in Designated Free Zones”
The Truth: The 0% corporate tax rate is not automatic. A business must opt in through the FTA portal and meet all eligibility requirements to qualify. Without this, the standard 9% rate applies.
4. “We Can Offset Our Mainland Company’s Losses Through a Tax Group with Our Free Zone Entity”
The Truth: Only free zone entities that don’t opt for the 0% tax regime can form a tax group with mainland companies. If you’re benefiting from zero-rated tax, tax grouping is off the table.
5. “Arm’s Length Pricing Doesn’t Matter If We’re Taxed at 0%”
The Truth: Incorrect. Transfer pricing rules and documentation obligations apply even if you’re under the 0% regime. Free zone entities must comply with Article 34 (arm’s length principle) and maintain detailed records as per Article 55.
6. “Audit Requirements Only Apply If Turnover Exceeds AED 50 Million”
The Truth: Not quite. If you're claiming the 0% rate, an audit is mandatory, no matter your turnover. Additionally, the auditor’s details must be provided when submitting your return.
7. “Leasing Our Free Zone Warehouse is Automatically Tax-Free”
The Truth: Rental income can be considered qualifying income—but only if the lease is for commercial property and to another free zone entity. If not, it becomes taxable at 9%, and might not even qualify under the de minimis threshold.
8. “Our IFRS 10 Consolidated Accounts Are Enough for Tax Purposes”
The Truth: Not always. You may need to prepare a separate consolidation for UAE-resident entities. Unless you're in an approved tax group, each licensed entity must file its own return. Sometimes, two separate sets of consolidated statements are needed.
9. “Foreign Withholding Tax is a Deductible Business Expense”
The Truth: Withholding taxes are direct taxes, not business expenses—so no, they aren’t deductible in your UAE corporate tax return.
10. “We’re in a VAT Group, So We Can File a Single Corporate Tax Return Too”
The Truth: Corporate tax groups must be separately registered. Being in a VAT group doesn’t carry over. If you haven't applied to the FTA for tax group registration before the tax year ends, you’ll need to file individual returns.
11. “We Offer Consulting to Mainland Clients, But Our Free Zone Status Keeps Us Exempt”
The Truth: Services provided to mainland clients are non-qualifying activities. Income from these will be taxed at 9%, and it also factors into the de minimis threshold for maintaining zero-rated status.
Final Thoughts
The new corporate tax regime introduces both opportunities and obligations for UAE free zone entities. Misinterpreting the rules could result in penalties or loss of benefits. At Zyla Accountants, we help businesses navigate these complexities with precision and clarity.
Need help understanding your tax position or filing correctly? Get in touch with our advisory team today.