Can a Qualifying Free Zone Person elect to be taxed at the standard rate?
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Yes. A Qualifying Free Zone Person can choose to give up the 0% rate and be taxed at the normal rates instead - but once made, this choice locks out the 0% Free Zone benefit for that year and the next four years, so consider it carefully before submitting your tax return.
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The detail
Under Article 19 of the Corporate Tax Law, a Qualifying Free Zone Person (QFZP) may elect to be taxed at the standard rates in Article 3(1) instead of the Free Zone regime. The election takes effect either from the start of the Tax Period in which it is made, or from the start of the following Tax Period, at the taxpayer's choice. Making the election means the entity ceases to be a QFZP from the start of that period, and per FTA guidance it cannot revert to QFZP status for that period plus the four subsequent Tax Periods.123
What the law says
- Article 19 allows a QFZP to elect to be subject to Corporate Tax at the standard rates instead of the 0%/9% Free Zone rates.1
- The election is effective from either the current or the following Tax Period, as chosen by the person making it.1
- Once elected (or once QFZP conditions are otherwise failed), the person loses QFZP status from the start of that Tax Period and for the four following Tax Periods, per FTA guidance.3 Based on FTA guidance
What it depends on
- The election is only relevant to a Free Zone Person that otherwise qualifies as a QFZP under Article 18.4
- Making the election forgoes the 0% rate on Qualifying Income but does not restore the AED 375,000 0% threshold available to non-Free Zone persons.3 Based on FTA guidance
- The election can be made either outside the Tax Return or within it, and once made it will not be asked again in later returns for the lock-out period.5 Based on FTA guidance
Check before you rely on it
- Confirm whether you currently meet the QFZP conditions before deciding to elect out.
- Decide whether the election should start this Tax Period or the next.
- Record the election either separately or within the Corporate Tax Return.
Sources (5) — read the official text
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Article 19 – Election to be Subject to Corporate Tax
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Article 19 – Election to be Subject to Corporate Tax 1. A Qualifying Free Zone Person can make an election to be subject to Corporate Tax at the rates specified under Clause 1 of Article 3 of this Decree-Law. 2. The election under Clause 1 of this Article shall be effective from either of: a. The commencement of the Tax Period in which the election is made. b. The commencement of the Tax Period following the Tax Period in which the election was made. Chapter Six – Calculating Taxable Income
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Article 3 – Corporate Tax Rate
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Article 3 – Corporate Tax Rate 1. Corporate Tax shall be imposed on the Taxable Income at the following rates: a. 0% (zero percent) on the portion of the Taxable Income not exceeding the amount specified in a decision issued by the Cabinet at the suggestion of the Minister. b. 9% (nine percent) on Taxable Income that exceeds the amount specified in a decision issued by the Cabinet at the suggestion of the Minister. 2. Corporate Tax shall be imposed on a Qualifying Free Zone Person at the following rates: a. 0% (zero percent) on Qualifying Income. b. 9% (nine percent) on Taxable Income that is not Qualifying Income under Article 18 of this Decree-Law and any decision issued by the Cabinet at the suggestion 1 Definition added as per Federal Decree-Law No. 60 of 2023. 2 Definition added as per Federal Decree-Law No. 60 of 2023. Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 8 of the Minister in respect thereof. 3. Without prejudice to the provisions of Clauses (1) and (2) of this Article, the Cabinet at the suggestion of the Minister shall issue a decision regulating all cases, provisions, conditions, rules, controls, and procedures for imposing the Top-up Tax on Multinational Enterprises and the exemptions therefrom, so that the total percentage of the effective tax imposed on them is (15%) fifteen percent. 3 Chapter Three – Exempt Person
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• 3.3. If the Free Zone Person derives AED 5,000,000 from Excluded Activities (which normally gives rise to non-qualifying Revenue) but this Revenue is attributable to a Domestic Permanent Establishment (giving rise to income that is subject to the 9% rate of Corporate Tax per Section 3.2.3), its non-qualifying Revenue for the purposes of the de minimis calculation would be zero. Taxation of a QFZP If the Free Zone Person meets all the conditions (including the de minimis requirements) to be a QFZP, it will be subject to Corporate Tax at the following rates: • 0% on its Qualifying Income, and • 9% on its Taxable Income that is not Qualifying Income. A QFZP is not eligible to benefit from the 0% standard Corporate Tax rate applicable on Taxable Income up to the AED 375,000 threshold, and is subject to 9% on its Taxable Income that is not Qualifying Income. To determine its Taxable Income that is not Qualifying Income, the Free Zone Person should apply the standard Corporate Tax rules in Article 20 of the Corporate Tax Law (for example, the Foreign Permanent Establishment exemption) to any income sources that do not give rise to Qualifying Income, but without the benefit of Small Business Relief, Qualifying Group Relief, Business Restructuring Relief, transfer of Tax Losses, or the Tax Group regime. 3.4. Losing status of a QFZP A QFZP that elects to be subject to the standard Corporate Tax rules and rates or that fails to meet the criteria to be a QFZP for a certain Tax Period will cease to be a QFZP from the beginning of the Tax Period for which it elects to be subject to Corporate Tax or in which it fails to meet the criteria to be a QFZP, and the four subsequent Tax Periods. Corporate Tax Guide | Free Zone Persons | CTGFZP1 20
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Article 18 – Qualifying Free Zone Person
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Article 18 – Qualifying Free Zone Person 1. A Qualifying Free Zone Person is a Free Zone Person that meets all of the following conditions: a. Maintains adequate substance in the State. b. Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister. c. Has not elected to be subject to Corporate Tax under Article 19 of this DecreeLaw. d. Complies with Articles 34 and 55 of this Decree-Law. e. Meets any other conditions as may be prescribed by the Minister. 2. A Qualifying Free Zone Person that fails to meet any of the conditions under Clause 1 of this Article at any particular time during a Tax Period shall cease to be a Qualifying Free Zone Person from the beginning of that Tax Period. 3. Notwithstanding Clause 2 of this Article, the Minister may prescribe the conditions or circumstances under which a Person may continue to be a Qualifying Free Zone Person, or cease to be a Qualifying Free Zone Person from a different date. 4. The application of paragraph (a) of Clause 2 of Article 3 of this Decree-Law to a Qualifying Free Zone Person shall apply for the remainder of the tax incentive Federal Decree-Law No. 47 of 2022 and its amendments – Unofficial translation (as published by the Ministry of Finance) 25 period stipulated in the applicable legislation of the Free Zone in which the Qualifying Free Zone Person is registered, which period may be extended in accordance with any conditions as may be determined in a decision issued by the Cabinet at the suggestion of the Minister, but any one period shall not exceed (50) fifty years.
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4.3. Fields relating to Free Zones 4.3.1 Is the Taxable Person incorporated, established, or otherwise registered in a Free Zone? Answer ‘Yes’ or ‘No’ as applicable. This should be answered ‘Yes’ where: • you are incorporated in a Free Zone, or • you are incorporated outside of a Free Zone (for instance, in the UAE mainland or a foreign country), but you have a branch registered in a Free Zone. 4.3.2 Is the Taxable Person making an election to not be subject to Corporate Tax at the rate applicable to Qualifying Free Zone Persons? This is asking whether you choose to forego the possibility of being subject to Corporate Tax at the 0% rate for Qualifying Income of a Qualifying Free Zone Person and are instead electing to be subject to the standard Corporate Tax rates under the Corporate Tax Law on your Taxable Income.32 Making the election prevents you from being a Qualifying Free Zone Person, and thus you cannot benefit from the 0% rate for the current and next 4 Tax Periods.33 After this election is made (either outside of the Tax Return or when completing your Tax Return), this question will not appear for these subsequent periods. Answer ‘Yes’ or ‘No’ as applicable. If the answer to this question is ‘Yes’, go to Section 5 (Elections). If the answer to this question is ‘No’, go to question 4.3.3. If you have addressed this election outside the Tax Return, this field will not appear in your Tax Return. 4.3.3 Does the Taxable Person meet the requirements to be considered a Qualifying Free Zone Person? This question will be visible if you have answered ‘Yes’ to question 4.3.2. 32 Article 3 of the Corporate Tax Law. 33 Article 5(2) of Ministerial Decision No. 265 of 2023. Corporate Tax Guide | Tax Returns | CTGTXR1 39
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Written by AI from the FTA sources above and checked before display. Not tax advice or official FTA information - confirm with a tax adviser before you act. Full disclaimer
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