UAE Corporate Tax for Free Zone

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How Corporate Tax Works in UAE Free Zones

The United Arab Emirates is famous for its tax-friendly environment among entrepreneurs worldwide. However, the UAE’s government has introduced a corporate tax in June 2023. From June 2023, a corporate tax of 9% or 0% may be subjected to free zone businesses or qualifying Free Zone Persons based on their qualifying income. 

In contrast, businesses on the Mainland must have a standard 9% tax rate based on their taxable income, which exceeds AED 375,000. In short, both the free zone and the mainland must follow the Corporate Tax regulations in UAE.

If you are someone operating a business in the UAE free zone and want to know everything about the Corporate Tax in UAE free zonethen you must read this article.  The article will provide a deep guide about corporate tax in this area. From knowing who is considered a free zone person (FZQP) to understanding different business operations for tax implication, we will deeply dive into corporate tax in the UAE Free Zone. 

UAE corporate tax for free zone

UAE Corporate Tax in Free Zones – Overview

A Free Zone is a recognised and defined area within the country that is stated in a cabinet decision made at the request of the Minister.  The UAE, including the Emirate of Dubai and Abu Dhabi, is home to numerous free zones. 

Most free zones influence companies to register themselve in these areas. These free zones have seen numerous multinational and small and medium-sized companies registering 100% foreign-owned subsidiaries, not depending on a domestic shareholder. 

Most free zone companies have been considered vital goals for international trade. Free zones provide umpteen, like 100% foreign ownership, 100% returns on capital and profits, Corporate Tax exemptions in UAE free zones, 100% customs and VAT exemptions, and more.

The new Corporate tax law allows the United Arab Emirates government to accomplish the agenda of economic transformation, as tax exemptions to specific free zones play the role of a multiplier, ensuring certain conditions are met.  

The conditions on tax exemptions in UAE Free Zones might collide with other amenities of the existing laws, like the effect on the existing Economic Substance Regulations (ESR). It is still being determined that further modification in the United Arab Emirates or UAE ESR will follow the implementation of Corporate Taxes. 

 

Tax rates for Free Zones

The UAE Ministry of Finance has pointed out that the new Corporate tax in the United Arab Emirates impacts businesses registered in Free zones. However, it was observed that the tax incentive provided by the free zones would be honoured by the new systems that meet the compliance requirements and do not perform domestic businesses with UAE Mainland Companies or business owners.

 

As per federal decree law on Corporate Income Tax, Corporate tax shall be imposed on a Qualifying Free Zones Person (QFZP) at the following rates:

 

  • 0% (zero per cent) on qualifying incomes
  • 9% (nine per cent) on non-qualifying income. 

 

The regulations of the FTA define and determine the specific qualifying income for a free zone person or entity.  However, the corporate tax for companies on the Mainland becomes precise and is calculated based on the taxable income earned by the business.

UAE corporate tax for free zone

Qualifying Free Zone Person – Overview 

A Qualifying Free Zone Person (QFZP) is one who fulfils the conditions of the Decree-law. These people are subject to the 0% (zero percent) Corporate Tax in UAE free zoneThese people must meet the following conditions:

 

  • Has not elected to be subject to UAE Corporate Tax under this Decree-Law. 
  • Complies with the Principle of arm-length and Transfer Pricing Documentation of this Decree-Law
  •  Derives Qualifying Income as certified in a decision issued via the Cabinet at the suggestion of the Minister.
  • Maintains appropriate substance in the State

 

A Qualifying Free Zone Person who fails to fulfil any standards outlined in the above points at any point during a Tax period ceases to be a Qualifying Free Zone Person (QFZP) as of the beginning of that tax period.  

If a person fails to meet the preceding criteria,  the Minister may mention the condition or circumstances under which he or she can continue or cancel to be a QFZP person as of a different date.

 

A Qualifying Free Zone Person will be subject to a 9% (nine per cent) taxable income for the entire tax incentive period as specified by the relevant legislation of the Free Zone where the person is registered. This period can be extended under certain conditions as determined by a decision issued by the Cabinet, upon the Minister’s suggestion.Still, no one period shall exceed fifty years. 

 

List of qualifying activities

As per the Ministerial Decision No. 139 in 2023, the following are qualifying business activities performed from which a person can become QFZP:

  • Manufacturing of products or materials.
  • Processing of goods or materials.
  • Treasury and financing services to Related Parties.
  • Financing and leasing of Aircraft, like engines and rotable components.
  • Wealth and investment management services
  • Headquarters services to Related Parties
  • Ownership, management and operation of Ships.
  • Reinsurance services
  • Holding of shares and other securities for investment reason
  • Fund management services
  • Distribution of goods or materials from or in a Designated Zone 
  • Trading of qualifying activities
  • Logistics services.
  • Any activities that are ancillary to the Qualifying Activities specified in paragraphs (i) to (xii) of this Clause.

 

List of excluded activities

Indeed, QFZP can enjoy Corporate Tax benefits in UAE Free zone by performing qualifying business activities. However, there are some activities that are excluded from Qualifying activities. Below is the list of excluded business activities:

 

  • Any financial transaction with a natural person except some transactions
  • Banking activities
  • Ownership or exploitation of immovable property, except Commercial Property situated in a Free Zone where the transaction to such Commercial Property is conducted with other Free Zone Persons
  • Finance and leasing activities except
  1.       Treasury and financing services to Related Parties.
  2.       Financing and leasing of Aircraft

Iii. Ownership, management, and operation of ships

  • Insurance activities except reinsurance activities and treasury and financing services

 

How Can Flyingcolour Tax Consultant help you?

Understanding UAE Corporate Tax regulations can be complex for most people. Flyingcolour Tax Consultant can help you understand everything about Corporate Tax in the UAE free zone. We can clear any doubt about the UAE corporate tax. In addition, our experts can help you to file your corporate tax return with ease. 

To learn more about the How Corporate Tax Works in UAE Free Zones, book a free consultation with one of the Flyingcolour team advisors, simply call +971 50 5585305 or send WhatsApp messages to +971 4 4542366. you can also drop an email to info (at) flyingcolour (dot) com.

This article was published on 01-04-2024. The information provided in the article is based on the policies and rules applicable at the time of writing it. Talk to one of our consultants for any recent updates or changes

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