Dynamically fortify tax resilience through localized operational anchors. Strategically enhance economic presence to preserve preferential Free Zone status under evolving compliance frameworks.
A technology consulting company operating from a UAE Free Zone approached us for advisory support ahead of its first UAE Corporate Tax return. While the entity was confident in benefiting from the 0% Free Zone Corporate Tax regime due to its qualifying activity status, our review revealed a critical compliance risk: lack of demonstrable substance, particularly insufficient assets, physical presence, and personnel in the UAE.
The client maintained a legal license and minimal co-working office space, but its key staff, servers, and decision-makers were located outside the UAE. Revenue was generated from regional clients, and day-to-day operations were remotely managed from Europe. The company assumed that registration alone within a Free Zone sufficed to retain the 0% CT benefit.
We clarified that under Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, access to the Free Zone tax incentive (0%) is contingent upon the company:
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Earning Qualifying Income from Qualifying Activities;
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Maintaining adequate substance in the UAE;
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Not earning non-qualifying income or transacting with mainland UAE in a non-qualifying manner;
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And meeting the arm’s length principle and transfer pricing documentation where applicable.
In particular, Article 18(3)(b) requires a Free Zone Person to have “adequate assets, an adequate number of qualified employees, and adequate operating expenditures” in the UAE. Failure to meet these thresholds risks the entire income being taxed at the standard 9% rate, not just non-qualifying revenue.
Based on this, we advised the client to take the following actions:
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Lease a dedicated office space that reflects the nature and scale of its UAE operations.
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Relocate or hire at least minimal qualified personnel in the UAE to handle core activities.
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Move certain business-critical assets (such as servers and support infrastructure) to the UAE or substantiate local use.
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Properly document its governance and operations through UAE-based board meetings and operational control.
These measures would help the company align with Ministerial Decision No. 139 of 2023 and relevant FTA guidance on substance, thereby supporting its claim for the Free Zone tax regime and reducing audit exposure.
Through this restructuring, the company significantly improved its economic presence in the UAE and built a robust foundation for long-term tax efficiency under the Corporate Tax law.
