A free zone company can pay 0% on qualifying income, but only if it meets every condition.
The conditions
The entity must maintain adequate substance, derive qualifying income, comply with transfer pricing rules, prepare audited financial statements and not elect to be taxed normally.
Qualifying vs non-qualifying income
Transactions with other free zone persons and certain qualifying activities can be taxed at 0%. Income from the mainland and from non-qualifying activities is taxed at 9% unless an exception applies.
De minimis rule
If non-qualifying income exceeds the de minimis threshold, the entity loses its qualifying status for the period and for the following four years.
Key takeaways
- Test qualifying status every year
- Keep evidence of substance
- Track revenue by source
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