UAE VAT and corporate tax rules often lead businesses to assume that services provided to non‑UAE clients or activities conducted in a free zone are automatically exempt from tax. In reality, both the 0 % VAT rate and the “Qualifying Free Zone” status are subject to strict conditions that must be met on a case‑by‑case basis.
When is 0 % VAT actually charged?
Under Article 31 of the UAE VAT Executive Regulations, a service can be zero‑rated only if all of the following are satisfied:
- The recipient has no place of residence in the UAE (or any implementing GCC state).
- The recipient is physically outside the UAE at the time the service is performed.
- The service does not relate to UAE real estate or to goods physically located in the UAE.
An additional anti‑avoidance test applies: zero‑rating is denied if it is reasonably foreseeable that the service will be received or used by someone in the UAE (e.g., an employee or director of the client). The Federal Tax Authority focuses on where the service is genuinely consumed, not merely on the client’s registered address.
Implications for corporate services – Company formation, licensing, immigration and residency processing, and corporate structuring are inherently UAE‑anchored. Even when the client is overseas, the outcome (a UAE‑registered company, visa, or structure) is created and used in the UAE, which generally results in the standard 5 % VAT rate. Misapplying zero‑rating can lead to penalties on audit, so each engagement should be reviewed by a registered UAE tax agent.
RAK International Corporate Centre and the “Qualifying Free Zone” announcement
Cabinet Resolution No. (109) of 2026 recognises RAK International Corporate Centre (RAK ICC) as a Qualifying Free Zone for UAE corporate tax purposes, retroactive to 1 June 2023. This recognition is a prerequisite for accessing the 0 % corporate tax rate but does not itself confer exemption.
What the resolution accomplishes
- Confirms RAK ICC’s status as a recognised free‑zone entity under the UAE Corporate Tax regime, making its entities eligible to apply for “Free Zone Person” status.
What the resolution does not accomplish
- It does not automatically grant a 0 % tax rate to RAK ICC entities. Each entity must satisfy the Qualifying Free Zone Person (QFZP) test defined in Federal Decree‑Law No. 47 of 2022.
QFZP conditions (all must be met)
- Free Zone Person – incorporated, established, or registered in a recognised free zone.
- Adequate substance in the free zone – real presence demonstrated through core income‑generating activities, assets, qualified employees, and operating expenditure.
- Qualifying Income derived from Qualifying Activities as defined by Cabinet and Ministerial Decisions.
- No election to be subject to the standard UAE corporate tax regime.
- Full compliance with transfer‑pricing rules and documentation.
- Audited financial statements and any additional conditions prescribed by the Minister.
A de‑minimis threshold also applies: non‑qualifying revenue must remain below the lower of AED 5 million or 5 % of total revenue in a tax period. Exceeding this limit, or failing any single condition, results in loss of QFZP status for the current and the next four tax periods, with the entity taxed at the standard 9 % corporate tax rate on its full income.
Relevance for typical RAK ICC entities
RAK ICC has traditionally been used for offshore‑style holdings that lack a physical UAE office, local staff, or trade licence. The “adequate substance” requirement therefore poses a significant hurdle for many such structures, as they must demonstrate genuine operational presence in the free zone to qualify for the 0 % rate.
The retroactive effective date (1 June 2023) means existing RAK ICC entities may need to reassess their historic corporate tax treatment, potentially adjusting prior filings.
Bottom line
- VAT: A non‑UAE client does not automatically trigger a 0 % VAT rate. Services that result in a UAE‑based benefit (e.g., company formation, visas) are generally subject to the standard 5 % VAT.
- Corporate tax: RAK ICC’s recognition as a Qualifying Free Zone is a necessary but insufficient condition for a 0 % rate. Entities must meet all QFZP criteria, including substance requirements that many offshore‑style structures may find difficult to satisfy.
Both VAT and corporate tax outcomes depend on detailed, fact‑specific analysis. Incorrect application can lead to penalties, so consultation with a registered UAE tax agent is essential.
This article is for general informational purposes only and does not constitute tax advice. UAE VAT and corporate tax treatment must be confirmed with a qualified UAE tax professional based on the specific facts of each case.
Source article: knightsbridge.ae
