Summary
Think your Free Zone company is exempt from UAE Corporate Tax? Think again. From zero-tax myths to registration and group filings, this article busts 11 common misconceptions and reveals what every Free Zone business must know to comply with FTA regulations.
UAE Corporate Tax and Free Zone Companies: 11 Myths Busted
With the introduction of the UAE Corporate Tax, many businesses in Free Zones are caught in a web of assumptions and half-truths. At Unicorn Global Solutions, we believe in empowering businesses with the right information. So, let’s clear the air by busting 11 of the most common myths around Free Zone companies and corporate tax obligations in the UAE.
Myth 1: Holding a Free Zone license means no Corporate Tax
Fact: Not true. All Free Zone entities are subject to corporate tax. However, qualified Free Zone persons with qualifying income may benefit from a 0% tax rate—but only if they meet six specific conditions laid out by the Federal Tax Authority (FTA).
Myth 2: Free Zone companies don’t need to register or file returns
Fact: All Free Zone businesses must register with the FTA and file corporate tax returns, regardless of whether they qualify for 0% tax. Returns must be filed within 9 months after the end of the financial year
Myth 3: Designated Free Zone companies automatically get 0% tax
Fact: The 0% rate isn’t automatic. Companies must evaluate eligibility and opt in through the corporate tax portal. If not selected, the default 9% tax applies.
Myth 4: Free Zone and Mainland companies can offset profits and losses
Fact: Only Free Zone entities not availing the 0% regime can form a tax group with mainland entities and offset losses. Qualified Free Zone persons cannot be part of such tax groups.
Myth 5: Transfer pricing doesn’t apply if we’re claiming 0% tax
Fact: To benefit from 0% tax, Free Zone entities must follow the arm’s length principle when dealing with related parties and connected persons. They must also maintain proper documentation as per FTA guidelines.
Myth 6: Audited Accounts Are Not Mandatory for Free Zone Entities with Turnover Below AED 50 Million
Fact: Regardless of turnover, any Free Zone entity opting for the 0% corporate tax regime must have its financial statements audited. This is a mandatory requirement. Additionally, such entities must disclose the name of their appointed auditor when filing their tax returns. Failing to meet this requirement could result in non-compliance penalties and jeopardize the 0% tax eligibility.
Myth 7: Lease Rental Income from Free Zone Properties Is Always Tax-Free
Fact: Lease rental income from commercial properties located within a Free Zone and leased to another Free Zone entity qualifies as income eligible for the 0% corporate tax rate. However, if the property is non-commercial or leased to a non-Free Zone entity, this income will be taxed at 9%. Furthermore, such income will not be considered under the de minimis calculation for determining qualifying income.
Myth 8: IFRS-10 consolidated statements are enough for tax filing
Fact: Consolidated financials that include non-resident entities are not sufficient. A separate set of financials for resident entities is required unless part of a registered corporate tax group.
Myth 9: Withholding taxes paid abroad can be claimed as business expenses
Fact: Wrong. Withholding tax is a direct tax and cannot be claimed as a business expense under UnicUAE corporate tax laws.
Myth 10: We are in a VAT group, so we can file a group CT return
Fact: VAT grouping and CT grouping are completely separate. Corporate Tax grouping requires separate registration with the FTA, and must be done before the end of the taxable year.
Myth 11: Income from mainland clients is exempt if we are a Free Zone company
Fact: Professional services provided from the Free Zone to the mainland are treated as non-qualifying income and taxed at 9%. This also affects your eligibility under the de minimis threshold for 0% tax.
Final Thoughts from Unicorn Global Solutions
Many Free Zone businesses are operating under dangerous assumptions. Understanding the truth behind these common myths is not just about compliance—it’s about protecting your business from penalties, reputation risks, and financial losses.
At Unicorn Global Solutions, we help you assess your eligibility, register correctly, and plan your tax strategy so you can benefit from the Free Zone incentives while staying fully compliant with the law.
At Unicorn Global Solutions, we simplify the process for you. Unicorn Global Solutions is here to help! Text us on whatsApp or call us today .
Frequently Asked Questions (FAQs)
Yes, all Free Zone entities opting for the 0% corporate tax regime must have their financial statements audited, irrespective of their turnover. The auditor's details must also be disclosed during tax return filing.
A commercial property refers to real estate used for business activities, such as warehouses, offices, or industrial facilities. Lease rental income from such properties within the Free Zone is considered qualifying income if leased to another Free Zone entity.
Yes, lease rental income from non-commercial properties or properties leased to entities outside the Free Zone is taxed at 9% and is excluded from qualifying income under the de minimis calculation
Failure to audit financial statements can result in non-compliance penalties and loss of eligibility for the 0% tax rate, as it is a mandatory requirement for Free Zone entities under this regime.
Free Zone businesses can benefit from a 0% tax rate on lease rental income only if the property is commercial and leased to another Free Zone entity. Non-qualifying leases are subject to a 9% tax rate.
Source
This article contains summarized content based on the original report published by Gulf News.
