Understanding Substance Requirements for Free Zone Persons in the UAE
Operating a business in a UAE Free Zone comes with several advantages—one of the most attractive being the 0% Corporate Tax rate on Qualifying Income. However, this benefit is not automatic. To continue enjoying the preferential tax treatment, a Free Zone Person must maintain adequate economic substance within the Free Zone.
In simple terms, the UAE wants to ensure that businesses benefiting from the regime are genuinely operating, not merely registered on paper. Below is a complete breakdown of what “maintaining substance” really means.
Core Income-Generating Activities Must Be Conducted in the Free Zone
A Free Zone Person must perform its core income-generating activities (CIGAs) within the Free Zone. These are the activities that directly create value and generate the revenue eligible for the 0% tax rate.
For example:
- A logistics company must carry out its distribution and warehousing operations in the Free Zone.
- A consulting firm must deliver its advisory services from within the Free Zone.
Important: For distribution activities, the activities must take place specifically in a Designated Zone, not just any Free Zone.
Adequate Assets, Employees & Operating Expenditure
To meet substance requirements, the Free Zone Person must demonstrate it has:
✅ Adequate Assets
Physical or intangible assets needed to carry out its qualifying activities inside the Free Zone.
✅ Full-Time Employees
Sufficient employees physically present in the Free Zone to perform the business functions. Outsourced staff do not replace the requirement for real presence.
✅ Adequate Operating Expenditure
Expenses must reflect real business operations—such as rent, salaries, utilities, admin costs, and operational spending.
Essentially, your business must show it is actually operating in the Free Zone—not just registered there.
Outsourcing Is Allowed—But With Conditions
The UAE Corporate Tax Law allows outsourcing of CIGAs, but with strict rules.
You may outsource CIGAs if:
- The service provider is located within the same Free Zone (or Designated Zone for distribution).
- You maintain adequate supervision over the outsourced tasks.
- The outsourced activities are still carried out inside the Free Zone.
This ensures the economic benefit remains within the UAE’s Free Zone ecosystem.
Special Rule for R&D and Intellectual Property (IP)
For Research & Development related to Qualifying Intellectual Property, the rules are more flexible.
A Free Zone Person may outsource R&D activities to:
- Any person in the UAE, OR
- Non-related parties outside the UAE
This is permitted as long as the business maintains proper oversight and control over the outsourced work.
This carve-out supports innovation-driven industries that often rely on external specialists.
Why Substance Matters
Failing to meet these substance requirements can lead to:
- Loss of the 0% Corporate Tax benefit
- Being taxed at the standard 9% rate
- Compliance penalties and additional scrutiny
Maintaining substance is not just a compliance obligation—it is the key to securing long-term tax advantages.
The UAE’s Free Zone tax regime is powerful, but it rewards real businesses that create real economic activity. If your company wants to maintain 0% Corporate Tax on Qualifying Income, now is the time to evaluate:
- Are your main activities truly happening inside the Free Zone?
- Do you have real employees, assets, and expenses there?
- Are you supervising any outsourced work properly?
Understanding and meeting these requirements ensures your Free Zone entity is fully compliant—and continues to benefit from the UAE’s competitive tax environment.
For more information reach out to info@wealthixadvsiors.ae