For UAE corporate tax for free-zone companies, what constitutes ‘adequate substance’?

For UAE corporate tax for free-zone companies, what constitutes ‘adequate substance’?

Discussions on the 0 per cent tax rate for free zone companies has focused on qualifying income (QI), qualifying activities (QAs), excluded activities and de-minimis rules. These topics are indeed important. However, attention on maintaining ‘adequate substance’ seems to have been lost. Free zone companies should ensure the adequate substance should not become their Achilles’ heel. It could not only wash away the 0 per cent preferential tax rate, but result in penalties and tax arrears. As per Ministry of Finance (MoF) FAQs, a Qualifying Free Zone Person (QFZP) must have - and be able to demonstrate - adequate substance in a free zone relative to the nature and level of its activities and the qualifying income it earns. Maintaining adequate substance involves having adequate staff and assets and incur adequate operating expenditure in the relevant free zone for the purposes of undertaking its core income-generating activities (CIGAs). As to how much would be ‘adequate’ – and how much would be too less - would not be a mathematical formula but a subjective assessment based on the level of activities and qualifying income. The core income-generating activities is not a compliance checklist but will need to be independently identified based