Penalties for Non-Compliance by QFZPs

The UAE Corporate Tax regime offers a 0% tax rate for Qualifying Free Zone Persons (QFZPs) — but this benefit comes with strict eligibility conditions, ongoing reporting obligations, and transfer pricing compliance.

Failure to comply may result in loss of QFZP status, tax reassessments, and financial penalties.

It outlines the penalties for non-compliance by QFZPs, covering corporate tax law, cabinet and ministerial decisions, and FTA administrative enforcement.

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📘 Key Legal References

The following laws and decisions govern QFZP compliance and penalties:

• Federal Decree-Law No. 47 of 2022 (UAE Corporate Tax)

• Cabinet Decision No. 75 of 2023 (Administrative penalties)

• Cabinet Decision No. 55 of 2023 (QFZP conditions)

• Ministerial Decision No. 139 of 2023 (Qualifying & excluded income)

• Ministerial Decision No. 265 of 2023 (Transfer pricing documentation)

• FTA Public Clarifications

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🛑 What Triggers Penalties or Disqualification?

A Free Zone entity may lose QFZP status or face penalties if it:

🔍 Area ❌ Non-Compliance Issue

QFZP Conditions Fails to meet substance, income type, or other eligibility requirements

Annual Declaration Does not file QFZP declaration on time

Segregated Accounting Fails to maintain clear separation of qualifying and non-qualifying income

Transfer Pricing No arm’s length pricing or missing TP documentation

Audit Requirement Does not submit audited financials (if required)

CT Registration Fails to register or update corporate tax information

Filing Misses corporate tax return deadline

GAAR Breach Engages in artificial arrangements to abuse 0% benefit

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💥 Consequences of Losing QFZP Status

If a Free Zone company fails to meet any QFZP conditions:

• It is no longer eligible for 0% tax

• The entity will be taxed at 9% on its entire taxable income for the relevant tax period

• Reinstatement is not automatic — compliance must be re-established and reviewed in future periods

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💰 Administrative Penalties Imposed by the FTA

Here is a list of common penalties applicable to QFZPs for non-compliance:

📌 Violation 💸 Penalty

Failure to register for Corporate Tax AED 10,000

Failure to submit CT return on time AED 500/month (up to 12 months)

Late payment of Corporate Tax 14% per annum on payable amount

Failure to file QFZP declaration Up to AED 5,000 or disqualification

Failure to maintain records (7 years) AED 10,000 – AED 20,000

Incorrect return due to negligence AED 1,000 – AED 20,000

Non-cooperation during FTA audit AED 20,000

TP Disclosure Form not filed AED 10,000

Failure to provide TP documentation AED 500/day (up to AED 50,000)

Non-compliance with ESR Separate penalties under ESR law

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🧠 Additional Risk: FTA Use of Anti-Abuse Rules (GAAR)

Even if a company formally meets QFZP conditions, the FTA can recharacterize or disregard the structure under Article 50 GAAR if:

• The main purpose is to obtain a corporate tax advantage, and

• The arrangement is artificial or non-commercial

In such cases:

• QFZP status can be revoked retroactively

• Full 9% tax may apply

• Administrative penalties may still be levied

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✅ How to Stay Compliant as a QFZP

Compliance Area Best Practice

Corporate Tax Registration Ensure valid registration and update details as needed

QFZP Declaration File annual declaration accurately and on time

Income Segregation Use accounting software to classify income streams clearly

Substance Requirements Maintain leased office, active staff, and operational control

TP Compliance Prepare Disclosure Form, benchmarking, and Local File

Audit Reports Ensure audited financials if revenue exceeds AED 50 million

Internal Reviews Conduct QFZP eligibility checks before year-end

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🧑‍💼 How We Can Help

At Sheikh Anwar Accounting and Auditing LLC, we support Free Zone companies with:

• Ongoing QFZP compliance monitoring

• Transfer Pricing documentation

• FTA audit preparation

• Tax return filing and declaration support

• Penalty mitigation and rectification plans

📧 Email: info@sa-auditors.com

🌐 Website: https://www.sa-auditors.com