As the UAE continues to solidify its position as a global business hub, recent changes in corporate tax laws have sparked significant interest among investors and corporations alike. As per the new regulations, businesses operating in free zones will be treated differently than the ones in the mainland. Entities often look out for corporate tax advisory in Dubai before finalizing whether to operate in the UAE’s free zones or the mainland. With professional support, businesses can embrace the right track while adhering to the fresh tax regulations in the country.
An Overview of the Regulatory Framework in the UAE
In the UAE, free zones operate under distinct regulations and legal systems separate from those governing mainland entities. With over 40 multidisciplinary free zones across the country, Dubai continues to be a hotspot for global businesses. Each zone has its own regulatory authority. For instance, the DMCC (Dubai Multi Commodities Centre), JAFZA (Jebel Ali Free Zone), and Masdar City Free Zone in Abu Dhabi have historically offered enticing benefits like full profit repatriation and 100% foreign ownership.
Traditionally, free zones guaranteed zero personal and corporate income taxes for as long as 50 years, which significantly attracted investors. However, the landscape has evolved with the implementation of the UAE’s Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. This led to the introduction of a 9% corporate tax, which became effective from June 1, 2023, although there were exemptions and considerations for businesses operating in free zones.
Mainland entities, on the other hand, are subject to the same rate of corporate tax of 9% on their taxable income exceeding Dh 375,000. They operate with strict restrictions, adhering to stringent reporting standards and can carry out businesses both internationally and domestically. Thanks to recent amendments to the Commercial Companies Law, these entities enjoy 100% ownership in some sectors that bridge the gap between free zones and mainland operations.
Tax Implications and Considerations
Under the new tax regime, free zone entities meeting specific criteria may still enjoy exemptions. According to Article 18 of the Corporate Tax Law, free zone entities in the UAE will be exempted from fulfilling certain conditions. These are referred to as Qualified free zone Persons (QFZPs). Here are the conditions to obtain the QFZP status.
- Maintaining adequate substance in the country
- Obtaining the qualifying income
- The entity operating in the free zone shouldn’t have been elected to be subject to corporate tax
- Adhering to the document requirements and transfer pricing rules
- Satisfy any other conditions that the Minister in charge might prescribe
Qualified free zone Persons (QFZPs), adhering to regulatory requirements and maintaining a substantial presence within the UAE, can benefit from a 0% tax rate on Qualifying Income, with a 9% rate applied to other taxable income.
Adapting to the new regulatory landscape presents challenges for both free zone and mainland entities. It is imperative to ensure compliance with the intricate requirements and documentation to mitigate the risk of penalties and maintain operational efficiency.
With professional corporate tax advisory in Dubai, entities can make informed decisions when it comes to something as serious as taxation.
Avoid a AED 10,000 fine by Meeting UAE's Corporate Tax Deadlines. Contact us for Expert Tax Compliance Guidance and Protect your Business.
Professional Tax Advisory Services in Dubai
While the new tax laws aim to harmonize regulations, they also present opportunities for entities to reassess their operational and tax structures. As MNCs explore these changes, strategic planning and compliance will continue to be the key to capitalize on emerging opportunities and mitigate risk strategically.
The IMC Group is a trusted team of professionals for complete corporate tax planning 2024. With experts available to guide you amidst the challenging corporate tax regime, you can comply with the prescribed norms.
Mainland entities will face the new corporate tax but with fewer operational restrictions than those imposed on free zone companies. They will also enjoy the corporate tax regime’s tax relief, allowing them to tap into benefits such as small business relief, business restructuring relief, and transfer within a qualifying group.
Adhering to new regulations might be challenging for both free zone and mainland entities, and it is crucial to navigate the complexities of the new tax law, ensuring compliance with the requirements and documentation to avoid penalties.
