Oh! Hell no!!

It is a common belief that being in the free zone “automatically” ensures that 0% rate of tax applies. However, given the fact that how the free-zone regulations have evolved in the UAE, it is very clear that the taxpayers need to tread carefully before making such assumptions, thereby filing erroneous tax filings. Let us discuss certain key aspects of the free zone regulation in the UAE and what the transfer pricing implications which UAE businesses should consider.

The UAE has long positioned its free zones as hubs of international business, oƯering attractive incentives such as 100% foreign ownership, simplified incorporation procedures, and customs benefits. With the introduction of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”), however, these advantages now coexist with complex regulatory obligations.

The Free Zone Corporate Tax Guide (“FZ Guide”) clarifies that free zone businesses can still enjoy a 0% corporate tax rate on qualifying income if they maintain the status of a Qualifying Free Zone Person (QFZP). Yet, this benefit comes with stringent conditions, including substance requirements, arm’s length compliance, and transfer pricing documentation obligations.

Conditions to qualify as a free zone person 

To be treated as a QFZP, a free zone entity must satisfy all the following:

1. Be incorporated, registered, or established in a UAE free zone.
2. Maintain adequate substance within the free zone.
3. Earn qualifying income, either from free zone-to-free zone transactions, specified qualifying activities, or qualifying intellectual property.
4. Not elect to be taxed at standard rates.
5. Comply with the arm’s length principle for related-party transactions.
6. Maintain transfer pricing documentation (master file, local file, disclosure form).
7. Prepare audited financial statements.
8. Meet de minimis thresholds

The UAE CT law is clear to mention that the failure to meet any of these requirements results in the loss of QFZP status for the current and following four tax periods.

Managing substance in free zones

The cornerstone of the regime is substance: a free zone entity must demonstrate that it undertakes its core income-generating activities (CIGAs) in the free zone and has adequate staƯ, assets, and expenditure to support these activities.

Examples of such activities could be:

• Headquarter entities must show that strategic decision-making occurs in the free zone.
• Holding companies must document that board meetings are held locally.
• Service providers must employ suƯicient qualified staƯ in the free zone, not merely outsource operations.

Outsourcing of CIGAs is permitted only if performed to another free zone entity and under adequate supervision, which must be evidenced through contracts, reporting mechanisms, and managerial oversight.

Transfer pricing in free zones

Arm’s length Principle

The arm’s length principle is explicitly embedded in free zone rules. Related-party transactions must be priced as if they occurred between independent enterprises and this is one of the key conditions for ensuring that the QFZP benefit is availed.

It has often been observed that many businesses ignore certain key transactions and charges which should ideally be cross-charged to their free-zone related parties. Some of these transactions could be:

• Corporate charges & management fees: Must reflect actual services rendered and benefits received.
• Board fees: Should align with comparable board remuneration for companies of similar size and industry.
• Interest-free loans: Risk-adjusted returns must be benchmarked. If an interestfree loan exists, transfer pricing adjustments may be required to impute arm’s length interest.
• Service charges (e.g., IT, HR, shared services): Allocation keys (headcount, revenue, usage) must be consistent, documented, and defendable.
• Free of cost supplies: Unless otherwise sent as “samples”, appropriate charges should be charged to the free-zone companies to reflect true and fair profitability.

It is critical that documentation substantiating QFZP status is maintained to the highest standard, as the UAE FTA is expected to rigorously test and challenge such claims. While the standard documentation requirements are Master file (detailing global group operations and policies), Local file (documenting UAE-specific transactions), and Disclosure form (summarising related-party transactions), it would be good to also have the following as a back-up:

• Board minutes for critical decisions
• Copies of emails for demonstrating the need-benefit analysis for services
• Loan agreements wherever not maintained
• Service contracts and POs
• Cost allocation backups and calculations

Practical workplan: ensuring arm’s length in free zones

To safeguard compliance and manage risks, UAE free zone businesses should adopt a structured approach:

1. Substance mapping – Assess whether CIGAs are carried out in the free zone; ensure board minutes, staƯing, and assets are aligned.
2. Transaction inventory – Identify all related-party dealings (services, loans, management fees, IP use, etc.).
3. Benchmarking analysis – Apply OECD-compliant comparables for fees, interest rates, and service allocations.
4. Cost allocation framework – Implement consistent, defensible keys (e.g., headcount for HR costs, usage for IT charges).
5. Documentation & disclosure – Prepare local and master files, maintain contemporaneous evidence, and file FTA disclosure forms.
6. De-minimis monitoring – Track non-qualifying revenue against thresholds during the year.
7. Audit-readiness – Maintain audited financial statements and supporting documentation to defend positions in case of FTA scrutiny.

Conclusion

Free zones remain attractive, but the era of “all free in free zones” has ended. With the CT law and transfer pricing framework now in eƯect, the FTA has signalled that compliance, transparency, and substance are the price of enjoying preferential tax treatment.

UAE businesses should adopt robust governance frameworks to manage related-party transactions, substantiate arm’s length pricing, and continuously monitor compliance thresholds.