Free Zone Distributor Losing QFZP Status

Many companies established in the UAE Free Zones aim to benefit from the 0% corporate tax rate as who would not want to save taxes legally? Since the new corporate tax law is already in effect, if a business wants to qualify for 0% tax rate, it must follow certain rules. There is one rule that many people do not understand well is the limit on non-qualifying income. If a Free Zone company’s non-qualifying income exceeds AED 5m or 5% of its total sales during the tax period (whichever is higher), it loses the QFZP status. We have shared our experience of how a medical supply company lost its QFZP status and how we helped them make changes to their business so that they can achieve that status again.

Client Background

ABC Medical Devices FZ-LLC is based in Jebel Ali Free Zone, and its main focus is on selling and distributing diagnostic and surgical tools. In 2024, the company generated AED 12 million in business revenue from both private as well as public healthcare providers. Although it was established in a Free Zone, but still many of its clients were based in the UAE mainland.

Challenges Faced with QFZP Compliance

Client approached us for corporate tax filing of their mainland entity and requested us to briefly review their QFZP status for the entity registered in the Free Zone. They were confident that they are qualified for the Free Zone tax benefits. But when we examined their business transactions and checked their records, we found that their non-qualifying income had gone over the limit allowed by the FTA.

• The company earned AED 12 million in total, and from this amount, AED 2.1 million came from mainland customers and one-time services. This portion of the revenue is considered non-qualifying.
• The allowed non-qualifying income in this scenario was AED 600,000 (AED 12m * 5%).
• Under the corporate tax law, going over the limit meant the company lost the 0% rate and had to pay 9% tax on all the taxable income.

Our Solution to Address QFZP Compliance Issues

• We started by dividing the income into two parts, first the qualifying and second the non-qualifying income, based on the type of service and where the clients were located.
• We calculated the corporate tax liability now applicable due to the loss of QFZP status. The client faced a tax liability of approximately AED 900,000 for the year.
• We guided our client how and why they lost their QFZP status. This did not only include generating non-qualifying income, but also included inadequate substance, and errors in recording several mainland revenue transactions under free zone.
• To ensure they could requalify as a QFZP in future, we proposed them to move the mainland related services to mainland company, bring in more employees under the free zone to enhance their substance, cease to provide any excluded activities from the free zone entity, dedicate a separate resource to ensure the QFZP guidelines are adhered for every business transaction.

Results and Client Feedback

Losing the QFZP status was a big wake-up call for the client, but they were thankful for the clear advice and support from Vertix Auditing. They are now fully following the rules, have setup a dedicated resource to monitor qualifying and non-qualifying income, and are working with us to restructure their business to qualify again for QFZP. This case shows why it is so important to keep track of your income sources and understand tax rules that apply to your business to avoid losing corporate tax benefits, face cash flow challenges, and disrupt operations.

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