NAQIXFree zone or mainland: bookkeeping differences for UAE companies
Whether your licence comes from a free zone authority or a mainland department affects who you can sell to, how VAT applies to some movements of goods and, under Corporate Tax, whether part of your income may be taxed at 0%. None of that can be answered at year end unless the books were set up for it. Here are the differences that matter for bookkeeping.
The differences at a glance
| Topic | Mainland company | Free zone company |
|---|---|---|
| Licence | Issued by the emirate's economic department | Issued by the free zone authority, for activities that zone permits |
| Selling in the UAE | Directly to customers anywhere in the UAE | Often limited for mainland customers, depending on the zone and activity |
| VAT | Standard UAE VAT rules | Generally the same, with special rules for certain goods in designated zones |
| Corporate Tax | 0% up to AED 375,000 of taxable income, 9% above | A qualifying free zone person may pay 0% on qualifying income and 9% on the rest |
| Audited accounts | Required for Corporate Tax above a revenue threshold | Required for any qualifying free zone person |
Each point has conditions and exceptions. Use this table to frame questions for your adviser, not as an answer.
VAT: free zones and designated zones
For VAT, most free zones are treated like the mainland: supplies made there are subject to UAE VAT in the usual way. Designated zones are a smaller group of zones named by Cabinet decision, which can be treated as outside the UAE for certain supplies of goods, provided strict conditions about the goods and their movement are met. Services supplied in a designated zone are generally subject to VAT as normal.
For bookkeeping, that means three habits. Record the VAT treatment on each invoice when it is raised. Keep each customer's location, including whether it is in a designated zone. And keep the evidence of where goods moved, such as customs and transport documents, with the invoice. Confirm designated-zone treatments case by case with your tax adviser.
Corporate Tax for free zone persons
A qualifying free zone person can pay 0% Corporate Tax on qualifying income. To qualify, a company generally has to maintain adequate substance in the zone, earn qualifying income, not elect to be taxed at the standard rates, follow the transfer-pricing rules and prepare audited financial statements. Non-qualifying revenue must also stay within a de minimis limit, the lower of 5% of total revenue or AED 5 million. Fail a condition and the company can lose the benefit for several years.
Most of these tests are applied to numbers in your books. Your adviser will want to see:
- revenue split by activity and by type of customer: other free zone persons, mainland customers and customers abroad;
- non-qualifying revenue tracked through the year against the de minimis limit;
- staff, premises and other costs that show substance in the zone;
- transactions with related parties and connected persons, recorded separately at arm's length;
- income of any mainland branch kept apart from the free zone company's other income.
Setting up the books
- One company per licence. A free zone company and a mainland company are separate legal entities with separate books, even when the same people own them.
- Income tagged by stream. Use separate revenue accounts or cost centres for each activity and customer type your adviser needs to see.
- Customer master data. Record each customer's emirate, zone and TRN when the account is opened.
- Treatment on every invoice. Standard-rated, zero-rated, exempt or out of scope, decided at the time of sale.
- Inter-company accounts. Balances between your companies sit in named accounts and are agreed every month.
- A monthly review. Look at the revenue split each month, not only at year end, so a drift towards the de minimis limit is caught early.
Common mistakes
- One accounting file for two licences. Mixing a free zone company and a mainland company in one set of books makes every Corporate Tax question harder.
- Revenue in a single account. A single sales account cannot show qualifying and non-qualifying income, or sales to mainland customers.
- Customer location unknown. Without the customer's emirate, zone and TRN, VAT treatments and income analysis rely on memory.
- Inter-company balances left to year end. Unagreed balances between related companies are slow to fix and draw transfer-pricing questions.
- Substance not documented. Staff, premises and decision-making in the zone should be visible in the books and in board records.
How NAQIX fits
- Each legal entity is a separate company in NAQIX, with its own books, TRN, base currency and numbering, and users can switch between the companies they have access to.
- Sales invoices carry a tax treatment of standard, zero-rated, exempt or out of scope, and each branch carries the emirate used on the VAT 201 return.
- Sales, expenses and journal lines can carry a cost centre, and the profit and loss can be filtered by cost centre or by branch to show each income stream.
- Invoices can be raised in other currencies, with the exchange rate saved on the invoice.
NAQIX does not decide whether you are a qualifying free zone person, which income qualifies or how a designated-zone supply should be treated, and it does not calculate Corporate Tax. Those are decisions for you and your adviser; NAQIX keeps the records they rely on. The Accounting & reports and Tax & compliance pages list the features, the NAQIX page for the UAE covers the local setup, and the UAE accounting software overview compares the options.