From June 2023, Free Zone Businesses and Qualifying Free Zone Persons may be subject to either 0% or 9% corporate taxes depending on their qualifying income. On the mainland however, businesses which exceed AED 375,000 were previously subject to an average standard tax rate of 9% based on taxable income exceeding AED 375,000. UAE will soon implement this new tax policy brought forward by Federal Tax Authority (FTA) and Ministry of Finance- Corporate Tax in UAE which will become operational from June 2023.
In the UAE, the legal corporate tax rate stands at 9%. In this session, we provide an overview of its tax structure as well as an examination of how corporate tax is impactful to both Mainland businesses and Free Zone enterprises in Dubai Free Zones. Businesses should understand what this policy entails for financial planning and compliance requirements related to Dubai Free Zones.
UAE Corporate Tax in Free Zones
Free zones are geographical regions designated and recognized within a state that have been formalized through Cabinet decision, at the Minister’s request. Within the UAE specifically in Dubai and Abu Dhabi there are multiple Free Zones established within their boundaries.
Free Zones have proven themselves an attractive environment for companies, attracting multinational as well as small and medium-sized firms that register 100% foreign-owned subsidiaries without depending on a domestic shareholder. Understanding the corporate tax implications in UAE Free Zones is of utmost importance for businesses operating there, as these areas may have different tax structures than mainland companies. Companies need to stay abreast of UAE corporate taxes to stay compliant with regulations and optimize their tax planning strategies. Free Zone companies enjoy numerous exemptions such as 100% foreign ownership, customs and VAT exemptions of up to 100%, returns on capital and profits and corporate tax exemptions etc.
Tax Rates for Free Zones
The UAE Ministry of Finance indicated that businesses registered in Free Zones will be affected by the new Corporate Tax system; however, any incentives provided by them would still be honored by it provided they meet compliance requirements and do not conduct domestic business with mainland UAE companies or entrepreneurs.
Will Free Zones Be Affected By Corporate Tax?
Corporate tax will have an impactful presence in free zones of the UAE. Businesses complying with regulatory requirements and not conducting operations within mainland UAE would receive some benefits of corporate tax reductions.
UAE Free Zones must register themselves and file annual corporate returns. As per the Federal Decree Law on Corporate Income Tax, the following is applicable. An individual residing within an eligible free zone must pay corporate tax at one of the following rates:
Income Qualifying Income will pay no taxes.
Taxable Income that Does Not Qualify for Qualifying Income
A Free Zone resident or entity’s qualifying income is defined and set forth by FTA; however, corporate taxes for businesses on Mainland become exacting calculations based on taxable income earned.
Compare Commercial Transmission Rates between UAE Free Zones and Mainland Businesses.
Corporate Tax for Free Zone Person:
Who Is A Qualifying Free Zone Person?
A qualifying Free Zone Person is defined in this Decree-Law as individuals fulfilling its conditions to pay no Corporate Tax on taxable income generated in their free zone operations.
Conditions for Qualifying Free Zone Person
Below we explore Article 18 of Corporate Tax Law which details what are necessary to become a Qualifying Free Zone Person.
- An individual qualifying as a free zone person fulfills all of the following conditions:
- Maintains adequate substance in the State.
- Derives Qualifying Income as defined in a Cabinet decision issued at the Minister’s request and does not elect to be subject to Corporate Tax under this Decree-Law.
- Conforms with Arm’s Length Principle and Transfer Pricing Documentation requirements of Decree Law 399-1 of 2002.
- Any Qualifying Free Zone Person who fails to satisfy any of the standards laid out above during any point during any Tax Period ceases being eligible as a Qualifying Free Zone Person from that Tax Period onward.
- Should an individual fail to fulfill any of the previous criteria, the Minister may outline conditions or circumstances under which they can continue or terminate being an eligible Free Zone Person as of a specific date.
- A Qualifying Free Zone Person will enjoy the 9% tax incentive period specified in his or her Free Zone’s applicable legislation, although the Cabinet may extend it as per Minister’s suggestion up to (50) fifty years.
According to Ministerial Decision No. 139 of 2023, certain business activities undertaken by qualifying free zone individuals qualify them as qualifying activities that deem them as qualifying free zone persons:
Qualifying Activity
- Fund management services regulated by a competent authority of a State.
- Treasury and financing services to Related Parties.
- Manufacturing goods or materials.
- Ownership, Management and Operation of Ships.
- Holding shares or securities (holding). Logistics services
- Financing and leasing aircraft (including engines and rotable components). Reinsurance services that fall under regulatory oversight by an authority in their State. Processing goods or materials.
- and Headquarters services for Related Parties.
- Wealth and investment management services are subject to regulatory oversight by the competent authority in each State. Any activities related to manufacturing, treasury and financing services of related parties fall within their purview as well.
- Distribution of goods or materials within or from a Designated Zone to customers who resell such items for profit or process or alter such goods for further sale or resale is considered “Reselling”, however processing or alteration to produce similar results are also considered “Resale”.
As per Qualifying Activity 13, any distribution of goods or materials must take place from within a Designated Zone and those entering the State must enter via that same Designated Zone.
Corporate Tax Services for Free Zones
ebs chartered accountants offers full legal, compliance and tax advisory support as well as business consulting services to implement corporate tax in UAE Corporate Tax 2024 Free Zone. Our experts have expertise in all areas of corporate tax.
With FTA Registered Corporate Tax Consultants in UAE, we provide businesses in the UAE with comprehensive corporate tax solutions. Services provided include.
Corporate tax assessment, registration, return filing, accounting services, audit services and advisory.
Need assistance with Corporate Tax? Look no further than us, we have just the solution for you.
FAQs
What is a corporate tax-free zone?
Corporate tax-free zones are designated areas where businesses can operate without paying certain taxes, promoting economic growth.
How can my business benefit from operating in a tax-free zone?
Doing business in such an environment may reduce tax liabilities, increase profitability and provide access to various incentives and exemptions that might otherwise not be available.
Are There Specific Requirements to Qualify for Tax-Free Zones?
Each tax-free zone may impose specific criteria regarding job creation or industry focus; therefore it is vital that businesses adhere to them before being accepted in one.
What factors should I keep in mind before establishing my business in a tax-free zone?
Before choosing to establish your business in such an environment, take into account factors like location, infrastructure, incentives available and their effect on your overall business strategy.
