Maintaining Adequate Substance and Outsourcing in UAE Free Zones: A Deep Dive into Article (8)

With the introduction of corporate tax in the UAE, Free Zone companies, especially those seeking to retain Qualifying Free Zone Person (QFZP) status, must now meet stricter regulatory standards. One of the most important aspects of compliance is outlined in Article (8) of the UAE Corporate Tax framework: Maintaining Adequate Substance and Outsourcing in a Free Zone.

In this blog, we explore what Article (8) means, why it matters, and how your Free Zone business can align with these new substance and outsourcing requirements.

What is Article (8) All About?

Article (8) sets out clear criteria for maintaining economic presence and control in a Free Zone. It requires QFZPs to demonstrate that their core income-generating activities (CIGAs) are being conducted within the Free Zone or Designated Zone, and that these activities are backed by:

• Adequate assets
• An adequate number of qualified full-time employees
• Adequate operating expenditures

This rule is designed to ensure that Free Zone companies contribute real economic value to the UAE, rather than just benefiting from the 0% tax rate without actual activity in the country.

What are Core Income-Generating Activities (CIGAs)?

CIGAs refer to the main business functions that create revenue or value for a company. These are not support activities like administration or bookkeeping. Depending on your business, CIGAs could include:

• Manufacturing
• R&D
• Distribution and logistics
• Software development
• IP management
• Trading operations

According to Article (8), the specific nature of CIGAs may vary per industry, but they must be central to how your company earns income.

Substance Requirements for QFZPs

To meet Article (8), a QFZP must show:

1. Business Activity Location 
Your core income-generating activities must be conducted in the Free Zone or Designated Zone, not outside.

2. Adequate Assets 
This includes property, equipment, or systems necessary to carry out your business activities within the zone.

3. Qualified Employees 
You must employ a sufficient number of full-time, qualified staff located in the Free Zone to handle the business functions.

4. Operating Expenditure 
Your company should incur an appropriate level of operational expenses in the UAE to support its core activities.

Failing to meet these criteria may result in the loss of QFZP status and subject your company to the standard 9% corporate tax.

Outsourcing Rules under Article (8)

While core functions should ideally be conducted in-house, Article (8) permits outsourcing, provided the following conditions are met:

1. Outsourcing within the Free Zone/Designated Zone

You can outsource core income-generating activities to another entity within the Free Zone or Designated Zone if you maintain adequate supervision over the work.

2. Outsourcing Outside the Free Zone (For IP Only)

For companies engaged in Intellectual Property activities, outsourcing to an external person outside the State is allowed if the person is not a related party and the QFZP retains adequate control and supervision.

This provides flexibility while still ensuring that the company is accountable for its key functions.

Why Article (8) Compliance is Crucial?

Free Zones are a popular choice due to tax advantages, but tax incentives come with responsibility. Article (8) serves multiple purposes:

• Preventing abuse of the 0% tax rate
• Encouraging real economic activity in UAE
• Aligning with global standards like BEPS (Base Erosion and Profit Shifting)

Non-compliance could lead to:

• Losing QFZP status
• Being taxed at the standard rate
• Penalties and scrutiny from tax authorities

Best Practices to Stay Compliant

Here are some actionable steps you can take to meet Article (8) requirements:

• Evaluate if your business has adequate staff, assets, and expenses in the Free Zone.
• Ensure outsourced parties are located in permissible zones and that your company maintains active supervision.
• Keep detailed records of business operations, staffing, expenses, and outsourcing arrangements.
• If your business relies heavily on intellectual property, check if outsourcing arrangements comply with Clause 3 of Article (8).
• Each business is different. Consulting with a tax advisor can help customize your compliance strategy.

Conclusion

Article (8) stands as a crucial part of the UAE’s corporate tax landscape for Free Zone companies, especially those aiming to retain Qualifying Free Zone Person (QFZP) status. It pushes businesses to move beyond paper registrations and contribute real substance to the UAE’s economy through staff, assets, and operational spending while still allowing flexibility through responsible outsourcing.

At Reyson Badger, we specialize in helping Free Zone businesses align with UAE corporate tax laws, including Article (8) compliance. From assessing your core income-generating activities (CIGAs) to advising on outsourcing practices and maintaining required substance, our experts ensure your operations remain compliant and tax-efficient.

As the UAE sharpens its focus on economic transparency, partnering with professionals like Reyson Badger can help you avoid costly mistakes, retain your 0% tax benefits, and confidently future-proof your business.