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 Persons
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
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
- 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.
