How to Handle the Most Common Audit Issues in UAE Free Zones?

Operating out of a UAE Free Zone gives you tax advantages and flexibility, but it also puts you under close scrutiny from the Federal Tax Authority (FTA). Free Zone companies aiming for the 0% corporate tax rate as a Qualifying Free Zone Person (QFZP) have stricter reporting and compliance standards than before.

These are the five most common issues flagged during audits, and what you can do to stay ahead of them.

1. Failure to Maintain Audited Financial Statements

The issue: Every Free Zone company, regardless of revenue, must prepare audited financial statements to qualify for the 0% tax rate. Skipping audits or submitting unaudited accounts can immediately disqualify you.

How to handle it:

• Engage an approved auditor familiar with your specific Free Zone.
• Close your books on time every year; avoid last‑minute reconciliations.
• Keep supporting records, bank statements, invoices, contracts, organized for at least seven years.
  

2. Lack of Economic Substance

The issue: Your business must demonstrate real operations in the Free Zone—staff, premises, and assets. Outsourcing everything or running a “paper company” puts your QFZP status at risk.

How to handle it:

• Maintain physical office space or flexi‑desk agreements that match your license
• Document employee contracts and their presence in the UAE
• Keep evidence of operational decision‑making (board minutes, management approvals) in the Free Zone
  

3. Breach of the De Minimis Threshold

The issue: Non‑qualifying income must stay below AED 5 million or 5% of total revenue, whichever is lower. Cross that threshold, and you lose QFZP benefits for five years.

How to handle it:

• Separate qualifying and non‑qualifying income streams in your accounting system
• Monitor monthly revenues to catch potential breaches early
• Adjust activities or restructure deals before crossing the threshold

4. Transfer Pricing and Arm’s Length Failures

The issue: Transactions with related parties must follow arm’s length pricing and proper documentation. Without this, the FTA can reassess your profits and apply penalties.

How to handle it:

• Prepare transfer pricing files annually, even if intra‑group transactions seem small
• Benchmark related‑party pricing against market data
• Obtain intercompany agreements that outline terms clearly
  

5. Misclassification of Qualifying vs. Non‑Qualifying Income

The issue: Incorrectly tagging income (e.g., mixing Free Zone trading income with banking or mainland property income) can break the De Minimis Rule and invite audits.

How to handle it:

• Classify income by activity at the transaction level, not just year‑end
• Keep a schedule explaining why each activity qualifies or doesn’t
• Review your classification quarterly, not just at audit time
  

Why This Matters?

Failing any of these tests doesn’t just mean penalties; it can cost you your tax‑free status for five years. Getting it right requires continuous monitoring, clean books, and professional oversight, not just annual compliance.

How Arnifi Can Help?

Arnifi’s accounting and bookkeeping team handles Free Zone compliance from start to finish: maintaining audited statements, monitoring thresholds, ensuring correct income classification, and preparing transfer pricing files. We set up systems so you’re audit‑ready year‑round, not scrambling at deadlines. If you’re unsure whether your company still qualifies for the 0% rate, or you want to safeguard it, our experts can review your books and fix gaps before the FTA does. Get a free consultation now!