Free Zone companies in the UAE must comply with federal tax legislation and adhere to Free Zone tax reporting obligations set by their respective Free Zone Regulatory Authorities (FZRAs). These Free Zone tax reporting obligations apply to all Free Zone entities, regardless of their size or activity, and are essential for maintaining Corporate Tax compliance, renewing business licenses, and supporting Qualifying Free Zone Person (QFZP) status where relevant.
This article outlines the principal Free Zone tax reporting obligations and Corporate Tax compliance requirements applicable to Free Zone businesses under the current regulatory framework.
Free Zone Corporate Tax Registration and Tax Return Filing
All Free Zone persons are required to register for Corporate Tax with the Federal Tax Authority (FTA), including entities seeking QFZP status.
Corporate Tax reporting obligations for Free Zone companies include:
- Filing an annual Corporate Tax return within nine months after the end of the financial year.
- Ensuring the accuracy of taxable income calculations, including adjustments required under the Corporate Tax law.
- Reporting non-qualifying income, exempt income and related disclosures where applicable.
- Maintaining supporting documentation that substantiates all figures reported in the tax return.
Free Zone entities that intend to benefit from the 0% Corporate Tax rate must also ensure that their annual tax reporting aligns with the QFZP conditions, including maintaining adequate substance, audited financial statements, and compliance with the de-minimis threshold for non-qualifying income.
Qualifying Free Zone Person (QFZP) Reporting Requirements
A Free Zone company may benefit from the 0% Corporate Tax rate on qualifying income if it meets the conditions set out under the UAE Corporate Tax law and related FTA guidance.
Key QFZP reporting-related tax obligations include:
- Preparing audited financial statements for each financial year as part of Free Zone Corporate Tax compliance.
- Demonstrating adequate substance in the Free Zone, including core income-generating activities.
- Disclosing qualifying and non-qualifying income categories in the annual Corporate Tax return.
- Monitoring the de-minimis threshold to ensure non-qualifying income remains within permitted limits for QFZP eligibility.
- Reporting related party transactions and compliance with UAE transfer pricing rules.
Failure to comply with these QFZP tax reporting requirements results in the loss of QFZP status for the relevant Corporate Tax period.
Free Zone VAT Registration and Return Filing Obligations
Free Zone entities are subject to UAE VAT obligations unless they fall below the mandatory registration threshold or qualify for voluntary VAT registration.
The VAT reporting and compliance obligations for Free Zone businesses include:
- Registering for VAT with the FTA when the mandatory threshold is met.
- Filing VAT returns and making payments within the prescribed deadlines.
- Applying the correct VAT treatment for supplies made within, to, or from Designated Zones.
- Maintaining documentation supporting zero-rated, exempt, and taxable supplies.
Although certain Free Zones are classified as Designated Zones for VAT, they remain subject to standard VAT rules with limited exceptions related to the movement of goods. Businesses must verify the current VAT status of their specific Free Zone , as designations may be updated.
Transfer Pricing Reporting Obligations for Free Zone Companies
Free Zone entities engaged in related party transactions must comply with UAE transfer pricing rules as part of their Corporate Tax reporting obligations
Transfer pricing reporting obligations include:
- Disclosing related party transactions in the Corporate Tax return.
- Preparing transfer pricing documentation where required, including Local File and Master File (if thresholds apply).
- Ensuring that intercompany transactions are priced in accordance with the arm’s length principle.
- Retaining documentation that supports transfer pricing analyses and methodologies.
Transfer pricing has become a central component of Corporate Tax compliance, particularly for multinational groups and Free Zone entities with cross-border operations.
Audited Financial Statements and Regulatory Reporting for Free Zone Compliance
Most Free Zone Regulatory Authorities require Free Zone businesses to submit audited financial statements as part of annual license renewal. These audits also support federal tax reporting, particularly for companies seeking QFZP status.
Typical audited financial reporting obligations include:
- Preparing annual financial statements in accordance with IFRS.
- Obtaining an audit from a Free Zone-approved auditor.
- Filing audited statements with the Free Zone authority within the required timeframe.
- Ensuring alignment between audited figures and Corporate Tax return disclosures.
Some Free Zones impose additional reporting obligations, including annual declarations, activity confirmations, or capital verification. These obligations vary depending on the Free Zone and the sector of activity.
Record Keeping and Documentation Retention for Free Zone Tax Compliance
Free Zone companies must retain accounting and tax records for a minimum of seven years, in accordance with UAE federal tax regulations.
Records to be maintained include:
- Financial statements and supporting general ledgers.
- Invoices, contracts, agreements, and bank statements.
- Documents supporting taxable and exempt supplies for VAT purposes.
- Transfer pricing analyses, intercompany agreements, and related records.
- Documentation used to assess and demonstrate QFZP eligibility.
Records must be readily accessible for review by FZRAs or the FTA during inspections or audits.
Penalties for Non-Compliance with Free Zone Tax Reporting Obligations
Non-compliance with Corporate Tax, VAT, or Free Zone Regulatory Authority reporting obligations may result in administrative penalties imposed by the FTA or the Free Zone Authority.
Penalties typically include:
- Administrative fines for VAT violations, which generally range from AED 500 to AED 50,000 depending on the nature and severity of the violation.
- Corporate Tax penalties, commonly ranging from AED 500 to AED 20,000 for issues such as late filing, inaccurate returns, or failure to maintain records.
- Free Zone authority penalties, which vary by jurisdiction and may involve monetary fines, restrictions on services, or suspension of the trade licence.
Timely compliance with all Free Zone tax reporting obligations and strong internal controls are essential to mitigate the risk of penalties and disruptions to business operations.
Free Zone Specific Tax Reporting Considerations
Although UAE tax legislation is federal, reporting requirements may differ across Free Zones. Each Free Zone Regulatory Authority may impose additional annual filings, declarations or audit requirements, depending on the activity and licensing type.
Free Zone companies should review the tax reporting regulations applicable to their specific Free Zone to ensure full compliance with both federal tax laws and local Free Zone regulations.
Conclusion
Free Zone tax reporting obligations in the UAE are designed to promote transparency, regulatory oversight, and compliance with federal tax laws. By maintaining accurate financial records, adhering to reporting deadlines, and confirming alignment with QFZP and VAT compliance requirements, Free Zone businesses can meet their obligations and preserve their compliance standing.
Proper oversight of Corporate Tax, VAT, and related reporting ensures that Free Zone companies operate within the UAE legal framework and remain prepared for regulatory reviews or audits.
About SimplySolved
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Partner with SimplySolved to build a compliant and reliable foundation for your UAE business and support to manage key Finance, Tax and HR/Payroll operations.
While this guide provides high-level guidance, it is not a substitute for tax or legal advice, and we encourage you to seek advice regarding the specific matters that concern you. If you wish to speak to us, you may contact us directly.
