Hi Eddy,

I'm Himanshi Dawra from DhanGuard.

When considering freezone companies in Dubai, it is important to understand that obtaining a free zone licence does not automatically make a company eligible for the 0% corporate tax rate. A company must satisfy the Qualifying Free Zone Person (QFZP) conditions and maintain them throughout the relevant tax period.

Here are answers to your questions.

1. What conditions must a free zone company satisfy to become a QFZP?

A free zone company must meet all the applicable conditions, including:

• Maintain adequate economic substance in the free zone.
• Generate qualifying income under the UAE corporate tax rules.
• Comply with transfer pricing and arm's-length requirements for related-party transactions.
• Maintain the required transfer pricing records and documentation.
• Keep non-qualifying revenue within the permitted de minimis threshold.
• Prepare and maintain audited financial statements.
• Avoid electing to be taxed under the standard corporate tax regime.

The de minimis threshold allows non-qualifying revenue of up to the lower of 5% of total revenue or AED 5 million during a tax period.

2. How are qualifying and non-qualifying income determined for a technology business?

This is particularly important for your proposed software and technology services company.

Generally, income from transactions with another free zone company may qualify if that customer is the beneficial recipient of the services and the income does not arise from an excluded activity.

However, income from mainland UAE or overseas customers qualifies only when it relates to an activity listed as a qualifying activity and is not an excluded activity.

For a technology company, consider these distinctions:

• Software development and IT consultancy: These services are not automatically qualifying activities simply because the company operates from a free zone.
• Services to free zone businesses: The income may qualify where the customer is the beneficial recipient and the activity is not excluded.
• Copyrighted software: Certain income from qualifying intellectual property, including copyrighted software, may receive qualifying treatment under the applicable intellectual property rules and expenditure-based calculation.
• SaaS and software subscriptions: These should be assessed based on the contractual rights, nature of the service and source of income. They do not automatically qualify as intellectual property income.

Therefore, your revenue streams should be reviewed individually before relying on the 0% corporate tax treatment.

3. What economic substance and operational presence are required?

A QFZP must undertake its core income-generating activities in the relevant free zone or designated zone, as applicable.

The company should maintain adequate:

• Office premises and business assets.
• Qualified full-time employees.
• Operating expenditure.
• Management and supervision of its core activities.

For a software company, this could involve maintaining appropriate development infrastructure, technical personnel, project management and operational records in the free zone.

Certain activities may be outsourced, provided the company retains adequate supervision and meets the applicable outsourcing conditions.

There is no single minimum employee count or fixed office size that guarantees compliance. The required substance depends on the nature and scale of the business.

4. Are audited financial statements and separate accounting records necessary?

Yes. A QFZP must prepare and maintain audited financial statements, regardless of whether its revenue exceeds AED 50 million.

Your company should also maintain clear accounting records that distinguish:

• Revenue from free zone customers.
• Revenue from mainland and overseas customers.
• Income from qualifying and non-qualifying activities.
• Intellectual property income and related development expenditure.
• Related-party transactions and transfer pricing arrangements.
• Operating expenses, payroll and business assets.

Separate tracking of revenue streams is particularly useful for monitoring the de minimis threshold and supporting the company's corporate tax position.

5. What could cause a company to lose QFZP status?

A company may lose its qualifying status if it fails to satisfy any required condition. Common risks include:

• Generating non-qualifying revenue above the permitted threshold.
• Failing to maintain adequate economic substance.
• Not preparing audited financial statements.
• Failing to comply with transfer pricing requirements.
• Earning income from activities that do not meet the qualifying income rules.
• Making an election to be taxed under the standard corporate tax regime.

Under the applicable rules, a company that loses QFZP status generally ceases to qualify from the beginning of the relevant tax period and for the following four tax periods.

During that period, the company is subject to the standard corporate tax rules. This can mean a 9% rate on taxable income, subject to the applicable provisions.

How Can DhanGuard Assist?

DhanGuard can help you compare Dubai free zone company formation options and understand the licensing requirements for software development, IT consultancy and other technology activities.

You can also explore our UAE free zone company formation services and business setup packages.

For your proposed business, I recommend reviewing your software services, intellectual property ownership, customer locations and expected revenue streams before selecting a free zone. This will help determine whether the proposed structure can meet the QFZP conditions or whether the standard corporate tax regime is more appropriate.

Best regards,
Himanshi Dawra
DhanGuard