Accounting, Free Zone, Insights

Key Audit Risks UAE Free Zone Companies Shouldn’t Ignore

August 20, 2025

Free Zones in the UAE continue to offer attractive tax benefits, including a  0% corporate tax rate for companies that qualify under the Qualifying Free Zone Person (QFZP) regime. But with the Federal Tax Authority (FTA) stepping up oversight in 2025, one key audit risk is falling short on compliance, making the bar higher than ever.

If your business is operating in a Free Zone, here are five common audit triggers you’ll want to stay ahead of:

1. Missing Audited Financials

All Qualifying Free Zone Persons (QFZPs), regardless of size, are required to prepare audited financial statements in compliance with IFRS to benefit from the 0% corporate tax rate.

IFRS requires comprehensive disclosures in the notes to the financial statements to ensure transparency. Failure to provide complete and accurate disclosures can lead to regulatory sanctions, fines, and other penalties especially in a highly regulated environment.

2. Lack of Real Substance

Free Zone entities must demonstrate adequate substance: core income-generating activities (CIGAs) performed within the Free Zone, supported by sufficient assets, local employees, and operating expenses. Outsourcing is allowed but must be supervised.

3. Mixing Income Types

Revenue must be clearly classified. Only transactions with other Free Zone Persons (the Beneficial Recipient) or qualifying activities generate Qualifying Income. Mainland UAE sales, property rentals, and excluded activities are considered non‑qualifying income, which can trigger audits or status loss if misclassified.

4. Breaching the De Minimis Threshold

If non‑qualifying income exceeds AED 5 million or 5 % of total revenue (whichever is lower), QFZP status is lost for the current and next four tax years.

5. Weak Transfer Pricing Documentation

Related-party transactions must follow the arm’s‑length principle, and companies must support them with compliant transfer pricing documentation aligned with UAE Corporate Tax Law Articles 34 and 55.

Need Support Navigating Free Zone Compliance?

If you’re not sure whether your business meets all the requirements, we can help. Our team supports Free Zone companies with practical guidance and strategic compliance—so you can avoid surprises and stay focused on growth.

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