30 Jul 2025
If you're operating in a UAE Free Zone, your audit obligations are stricter than ever. Here are the top compliance issues flagged by the FTA:
1. Failure to Maintain Audited Financial Statements: As per the FTA’s 2024 Corporate Tax Guide for Free Zone Persons (CTGFZP1), all Free Zone Persons must prepare and maintain audited financial statements, regardless of revenue size. This is a mandatory requirement to qualify for the 0% Corporate Tax rate as a Qualifying Free Zone Person (QFZP).
2. Lack of Economic Substance: To retain QFZP status, companies must maintain adequate substance—including staff, assets, and operations—in the Free Zone. Failure to meet this standard, or outsourcing activities without proper oversight, will disqualify your entity.
3. De Minimis Threshold Breach: A QFZP must limit its non-qualifying income to the lesser of AED 5 million or 5% of total revenue. If this is breached, the company loses QFZP status for five years and is taxed at the standard 9%.
4. Non-Compliance with Transfer Pricing & Arm’s Length Rules: The FTA mandates that Free Zone companies comply with transfer pricing documentation and apply the arm’s length principle in transactions with related parties. Failure to document or justify these transactions can result in tax adjustments and penalties.
5. Transactions with Ineligible Beneficiaries: Only transactions where the other Free Zone entity is the Beneficial Recipient are considered qualifying. Misclassifying these or engaging in excluded activities (e.g., real estate, finance) may lead to disqualification.
6. Improper Classification of Qualifying and Non-Qualifying Income: Misclassifying income from qualifying activities (e.g., Free Zone trading) versus non-qualifying (e.g., banking, non-business property) can breach the De Minimis Rule and trigger audits. The FTA requires detailed documentation to justify income classification during audits.
7. Inadequate Record-Keeping and Submission Deadlines: Failing to maintain detailed records or meet FTA deadlines for tax returns and financial statements can lead to penalties and loss of QFZP status.
Don’t Risk Your 0% Tax Benefits
Let AMCA’s experts help you stay fully compliant with the latest Free Zone requirements.
