Dual License in UAE: Corporate Tax Treatment for Free Zone Entities

What a dual business license in UAE means?

A dual license allows a Free Zone entity to legally conduct specified activities in both the Free Zone and mainland, subject to the relevant licensing approvals.

A company with a dual business license remains the primary legal entity unless the arrangement specifically creates another mainland or free zone branch as a separate legal entity.

Here are some examples of qualifying income and non-qualifying income categories for free zone entities:

Mainland business licences are issued by the relevant economic licensing authority in each emirate. Free Zone licenses are issued by respective Free Zone Authorities.

What business support is available for free zone companies with a dual license?

Some free zone hubs offer dual licensing so that businesses have mainland market access without relocating the business. Availability largely differs by jurisdictions; not all free zones offer dual licensing.

Each participating free zone has its own eligibility requirements.

Examples include the Meydan Free Zone as of publishing, a few others:

• Dubai: Dubai Airport Freezone (DAFZA), Dubai Multi Commodities Centre (DMCC), Dubai Silicon Oasis (DSO), and Dubai Design District (d3).
• Abu Dhabi: Masdar City, KEZAD, and Abu Dhabi Global Market (ADGM).
• Other Emirates: Ras Al Khaimah Economic Zone (RAKEZ), and Fujairah Creative City

Take note that this may change depending on the Free Zone Authority, and businesses should always confirm the latest framework with the relevant authorities.

Requirements may include:

• Existing Free Zone registration
• Approved business activity
• Additional approvals
• No Objection Certificate (NOC)
• Required documents
• Payment of applicable fees

Certain business sectors may require additional approvals from relevant government ministries for dual licensing.

Key benefits and common misconceptions for companies operating in Free Zones (including Corporate Tax treatment)

Free zones in the UAE allow 100% foreign ownership and are governed by respective regulatory frameworks, while mainland businesses typically require a local sponsor for full ownership.

Free Zone businesses may benefit from customs duty relief on qualifying goods that remain within the applicable customs framework or are re-exported, subject to UAE customs regulations.

QFZPs also have access to other commercial benefits of being in free zone hubs. This includes greater market access, improved operational flexibility, potential access to government contracts, where licensing rules permit, faster visa processing and access to foreign investors.

Misconception # 1- Dual licensing does not create a new tax regime.

A dual license does not automatically cause a company to lose QFZP status. Similarly, a dual license does not automatically preserve the 0% rate.

Corporate tax follows

• where the income is generated,
• the type of income earned,
• whether this income falls under Qualifying Income, and
• whether the company continues to meet all QFZP eligibility conditions

Misconception # 2- Dual licensing does not mean all mainland revenue is taxed the same rate.

Mainland facing revenue must be analyzed by transaction. Some mainland operations can still be Qualifying Income, such as:

• specific activities and transactions that qualify under the Cabinet and Ministerial Decisions
• qualifying services to mainland businesses where the activity itself is listed as a Qualifying Activity
• qualifying distribution activities
• qualifying logistics and industrial activities
• qualifying manufacturing
• qualifying headquarters services
• qualifying treasury services
• qualifying commodity trading (where conditions are met)

The customer being located in mainland UAE does not automatically determine the Corporate Tax outcome. The nature of the activity matters when evaluating income.

Misconception # 3 – Due to its operational flexibility, de minimis monitoring can take a backseat when dealing with local markets.

The de minimis test is meant to cap non-qualifying revenue so it does not go beyond the applicable threshold. This is often the lower value of 5% of total revenue or AED 5 million.

Sample calculation for de minimis test

If total revenue that year is AED 10m,

• AED 10m * 5% = 500,000

Then non-qualifying income must not exceed AED 500,000, which is the lower value in the test.

Failing the test means you lose QFZP status for the current tax period and the following four tax periods.

Dual licensed businesses often generate more mainland revenue, which means it is easier to surpass this threshold than you realize. De minimis monitoring is important regardless.

Make sure your Chart of Accounts properly tags each income as it comes to reduce compliance headaches later.

Dual Licensing and Permanent Establishment

Businesses operating both inside and outside the Free Zone should assess whether their mainland activities give rise to a Domestic Permanent Establishment.

If profits are attributable to that Domestic PE, those profits generally fall outside the Qualifying Income, and are taxed at 9%.

Real life examples for Dual Licensed Businesses

What documents do you need for business setup (Emirates ID, incorporation documents, etc)?

Businesses seeking dual licensing should expect to provide documentation demonstrating both their existing Free Zone registration and their eligibility to operate in the mainland.

The exact requirements vary depending on the participating Free Zone regulations, specific business activities, and applicable regulatory framework.

Typical documents may include:

• A valid Free Zone trade licence or business licence.
• A No Objection Certificate (NOC) if required by the relevant Free Zone Authority
• Emirates ID and passport copies of the company’s authorized manager or signatory.
• Incorporation documents, such as the Memorandum of Association (MOA), where requested.
• Details of the approved business activities
• Any additional approvals required by the competent government authority for regulated activities
• Proof that the existing Free Zone licence remains valid
• Completed application forms and payment of the applicable licensing fees

Maximizing setup for your registered business activity (for Free Zones in Abu Dhabi, GICC, etc)

Setup can vary depending on where the business creates new markets, so it helps to understand the broader business model and strategy of the business.

Certain free zones are designed for better operational efficiency and/or potential cost efficiency for different industries.

To obtain a dual license in Dubai, businesses must be registered with a valid license in a Free Zone that participates in the dual licensing program and submit an application to the relevant Mainland authority.

The application process for a dual license varies depending on the emirate’s Department of Economic and Tourism (DET).

Operational requirements for a dual license include having a physical office space (or alternatively, flexi-desks) and meeting specific licensing permits, and regulatory conditions that vary by business sector.

Streamlined setup and compliance of obtaining a dual license

Businesses should maintain documentation for at least seven (7) years on the following:

• which revenue is Qualifying Income
• revenue classification (i.e. which revenue is taxable)
• supporting contracts
• invoices
• transfer pricing documentation where relevant
• allocation of income
• audited financial statements
• evidence supporting de minimis calculation

What are other misconceptions on compliance for dual license?

1. Separate audited financial statements is required for Qualifying vs Non-qualifying Income or for a Domestic PE.
   
   A QFZP must prepare audited financial statements for each tax period as part of the eligibility conditions.
   
   While audited financial statements are required for the QFZP, the FTA does not require separate audited financial statements for Qualifying versus Non-Qualifying Income or for a Domestic Permanent Establishment.
   
   Instead, taxpayers must retain sufficient supporting documentation distinguishing Qualifying Income from Non-Qualifying Income.
2. All mainland revenue is taxed at 9%.
   Not necessarily. Some mainland transactions may still generate Qualifying Income if they fall within the prescribed Qualifying Activities.
3. A dual licence creates a separate company.
   Usually no. It is generally a licensing arrangement rather than a separate legal entity, although the legal structure varies. Businesses should confirm the arrangement with the relevant authority before expanding operations.

Expert guidance for old and new businesses in the UAE market

There are limitations to how well a business can establish its separate entity, so it pays to have expert support. Any business seeking expansion can benefit from an initial consultation to gain regulatory clarity and understand the setup costs based on many factors.