The UAE continues to be a preferred hub for entrepreneurs and investors seeking global opportunities to expand. While the country might be synonymous with a tax-free environment, entrepreneurs should be aware of recent changes in its corporate tax regime. With the recent implementation of the Federal Decree-Law No. 47/2022 on the Taxation of Corporations and Businesses, the tax-free environment has witnessed a change in paradigm. Effective from 1st June 2023, this new corporate tax regime in the UAE has been drawing the attention of investors. Forward-thinking organizations can reach out to established professionals for corporate tax advisory in Dubai to ensure compliance and manage their tax obligations.
Considering the gravity of the new corporate tax regime on your organization, it pays to understand the impact of taxation in the Free Zone areas in the UAE. In this comprehensive guide, you will get a clear understanding of the classifications, regulations, and benefits associated with Corporate Tax in the UAE Free Zones.
What Do Free Zones Mean For Your Business In The UAE?
Free zone areas have emerged as strategic business hubs in the UAE. These zones offer a wide array of incentives to businesses such as exemption from import and export duties, 100% foreign ownership, and several tax advantages. Businesses need to understand the clauses of Corporate Tax regulations to ensure compliance and capitalize on the advantages.
Free Zone Persons
For understanding tax obligations in the Free Zones in the UAE, it’s imperative to distinguish between Juridical Persons and Natural Persons. Natural Persons, operating independently, include sole establishments, freelancers, and civil companies. Although these individuals may carry out their business from a Free Zone, the UAE Corporate tax laws don’t recognize them as Free Zone Persons. Juridical Persons, on the other hand, include corporate entities like LLCs. They can attain the status of Free Zone Persons only when they are incorporated into these Free Zones.
What Are The Corporate Tax Rates For Free Zone Companies?
Based on their classification, corporate tax rates may vary for Free Zone companies.
- QFZP (Qualifying Free Zone Person): Eligible for a 0% tax rate on qualifying income.
- NQFZP (Non-Qualifying Free Zone Person): Not meeting specific conditions, leading to different tax implications.
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Criteria for Qualifying Free Zone Person (QFZP)
- Fulfill Adequate Substance in the UAE such as having sufficient assets, being involved in activities to generate income, having mandatory operating expenses and qualified employees
- As explained in Cabinet Decision No. 55 of 2023, the entity must get “Qualifying Income”
- Avoiding the applicability of the 9% tax rate
- Adherence with Arm’s Length & Transfer Pricing Rules
- Fulfilling other conditions outlined in the Cabinet Decision No. 139 of 2023
- Meeting the ownership criteria established by the free zone is crucial, typically permitting full foreign ownership
Taxation for Three Types of Business Activities in Free Zones
Business activities in Free Zones fall into three categories: qualifying activities, excluded activities, and other activities.
- Qualifying activities: Approved activities are defined as per the parameters of Cabinet Decision No. 139 of 2023. Companies actively involved in these operations may be eligible for tax incentives or exemptions.
- Excluded activities: Restricted activities include a list of operations that do not align with the criteria for tax benefits or exemptions mentioned under Approved activities. For businesses, it’s crucial to identify whether or not their activities come under this category.
- Other activities: These include activities that aren’t mentioned explicitly under the Qualifying or Excluded Activities lists. For these activities, the tax implications are decided after considering their nature and respective tax regulations.
Qualifying Income Categories
The structure of Qualifying Income is decided on the basis of the transactional nature and parties involved. These include:
- Transactions with Other Free Zone Persons, including qualifying income that covers all the transactions excluding the ones originating from Excluded Activities
- Transactions with Non-Free Zone Persons, where qualifying income includes revenue generated exclusively from Qualifying Activities, where Excluded Activities is considered ineligible
- All Other Transactions, where Qualifying Income may include extra revenue, and has to meet de minimis requirements
Tax on Accountable Income
- Tax on Accountable Establishment Income: Income attributed to Domestic or Foreign Permanent Establishments of Free Zone Persons is calculated at a 9% tax rate.
- Tax on Accountable Income to Establishments and Immovable Property: Tax rates on accountable income may vary on the basis of the nature of transactions and parties involved. It is crucial for businesses to understand these aspects to comply with tax regulations in Free Zones.
Eligibility for Corporate Tax in UAE Free Zones
To be recognized as a Free Zone Person under UAE corporate tax laws, entities need to satisfy the Minimis Requirement, which mandates that non-qualifying Revenue within a Tax Period remains below AED 5,000,000 or 5% of total Revenue, whichever is lesser.
Mandatory Corporate Tax Registration and Filing
Regardless of their qualifying status, all Free Zone entities are required to register for corporate tax and file their returns via the Federal Tax Authority (FTA) online platform.
Taxation for Free Zone Entities with Mainland Operations
For Free Zone entities with operations on the mainland, a 9% corporate tax rate is applicable to taxable income generated from mainland activities. However, income from Free Zone operations can still enjoy a 0% tax rate, provided that separate accounting records are maintained for Free Zone and mainland income.
Impact of Disqualification from the 0% Tax Rate
If an entity no longer meets the criteria for a Qualifying Free Zone Person, it will be disqualified from the 0% tax rate and will instead be subjected to the standard 9% corporate tax rate on income exceeding that generated on the mainland.
Requirement for Audited Financial Statements
To access the benefits of the 0% UAE corporate tax rate on Qualifying Income, entities must submit audited financial statements, ensuring accuracy and compliance in financial reporting.
Steps for Corporate Tax Exemption in Free Zones
Businesses seeking corporate tax exemption in Free Zones must follow a systematic process, including business formation, obtaining a business license, registering for tax, submitting required documentation, and undergoing review, resulting in the issuance of a tax exemption certificate.
Ongoing Compliance and Reporting for Free Zone Entities
Even with corporate tax exemptions, Free Zone entities must fulfil compliance and reporting obligations, including annual audits, timely renewal of tax exemption certificates, and adherence to Free Zone regulations, ensuring continued eligibility and regulatory compliance.
For corporates, it’s natural to wonder how to calculate the payable corporate tax in the UAE? For businesses, understanding Corporate Taxation in UAE Free Zones is crucial for seamless financial planning and adherence to norms. The IMC Group is your trusted partner for corporate tax advisory. With professional support from our expert team, you can embrace the new corporate tax regime with confidence.
