Corporate Tax in UAE Free Zone

Recently, the eagerly awaited Corporate Tax-Free Zone rulings have been unveiled. Specifically, on 30 May 2023, Cabinet Decision No. 55 of 2023 was enacted, aiming to determine the Qualifying Income for the Qualifying Free Zone Person in accordance with Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (referred to as the “CT Law”).

In addition, on 1 June 2023, the Ministry of Finance released Ministerial Decision No. 139 of 2023, which outlines the Qualifying Activities and Excluded Activities for the purposes of the CT Law. One should read this decision in conjunction with Cabinet Decision No. 55 of 2023 and CT Law to fully grasp the proposed regulations.

However, This blog post will delve into the details for those interested in learning more about UAE corporate tax-free zones. So, let’s continue reading to understand the subject comprehensively.

The UAE corporate tax-free zone Law specifies the taxation rates for a Qualifying Free Zone Person (“QFZP”) as follows:

1. So, Qualifying Income is taxed at 0% (zero per cent).

2. Taxable Income that is not considered Qualifying Income is taxed at 9% (nine per cent).

The much-anticipated clarification on Qualifying Income within the corporate tax UAE free zone has been provided, encompassing the following aspects:

• Therefore, Income generated from transactions with other Free Zone Persons, except for income arising from Excluded Activities.

• So, Income derived from transactions with a Non-Free Zone Person; Applicable solely to Qualifying Activities that do not fall under the category of Excluded Activities.
• However, Any other income will be considered Qualifying Income, provided the QFZP meets the de minimize requirements.

The following activities are considered Excluded Activities; Are not eligible for the benefits of the Corporate Tax UAE Free Zone:

• Transactions with natural persons (with exceptions in Qualifying Activities such as shipping and aircraft operations, fund, wealth, and investment management).
• Moreover, Regulated banking, finance, leasing, and insurance activities.
• So, Ownership or exploitation of intellectual property assets.
• Therefore, Ownership or exploitation of immovable property; Except for transactions with Free Zone Persons related to commercial property within a Free Zone.

The Qualifying Activities eligible for the Corporate Tax UAE Free Zone include:

• Manufacturing and processing of goods or materials.
• Holding of shares and other securities.
• Ownership, management and operation of ships.

• Regulated reinsurance and fund/wealth management, investment management.
• Headquarters, treasury and  financing services to related parties.
• Financing and leasing of aircraft
• Logistics.
• Distribution of goods in or from a designated zone

• Ancillary activities related to above

Note: To qualify as a Qualifying Activity within Dubai Airport Free Zone, the distribution of goods within or from a designated zone must adhere to specific conditions.

So, Being a Qualifying Free Zone Person enables a Free Zone entity to enjoy a 0% Corporate Tax rate exclusively on their Qualifying Income. To qualify as a Qualifying Free Zone Person, the following criteria must be met by the taxable free zone person:

1.”Maintain Adequate UAE Presence: The Free Zone Person must have a substantial operational presence in the UAE.” It can be proven with adequate number of employees, assets and office space in UAE free zone.

2. Derive Qualifying Income: The Free Zone Person’s income must be Qualifying Income, either in full or in part.

3. No Election for Standard Corporate Tax: Therefore, The Free Zone Person cannot choose the standard Corporate Tax rates.

4. Comply with Transfer Pricing Requirements: The Free Zone Person must comply with Corporate Tax Law’s transfer pricing regulations.

The Minister may prescribe additional conditions for Qualifying Free Zone Person status.

If a Qualifying Free Zone Person doesn’t meet conditions or opts for regular Corporate Tax; they’ll face standard Corporate Tax rates from the Tax Period they fail to comply.

The implications of failing to meet the qualifying conditions set forth in the UAE Corporate Tax Law and these Decisions are as follows:

1. Taxable Person Status: If a Free Zone Person does not satisfy any of the qualifying conditions, they will be considered a Taxable Person at standard rate

2. Corporate Tax Rate: As a Taxable Person, the non-qualifying Free Zone entity will be subject to standard rate of 9% on taxable revenue more than AED 375,000.

3. Minimum Duration: The Taxable Person will lose their qualifying free zone status and won’t be eligible for a minimum of 5 years, starting from the tax year of disqualification.

Free Zone Persons must adhere to the qualifying conditions to maintain their status and benefits as Qualifying Free Zone Persons under the UAE Corporate Tax Law.

To ensure adequate substance as a Qualifying Free Zone Person, the following guidelines must be followed:

1. Generating Activities in the Free Zone: The Qualifying Free Zone Person should conduct its primary income-generating activities within or from the Free Zone.

2. Maintaining Adequate Assets & Qualified Employees: It is essential to possess sufficient assets and have an adequate number of qualified employees in proportion to the level of activities carried out within the Free Zone.

3. Meeting Adequate Operating Expenditures: The Qualifying Free Zone Person should incur adequate operating expenditures that align with the extent of its operations and revenue within the Free Zone.

Therefore, A Qualifying Free Zone Person can outsource activities to a Related Party or a third party if these activities remain supervised. This provision allows businesses to streamline operations efficiently while maintaining the necessary substance to comply with the Free Zone regulations.

• The standard corporate tax in UAE rate is set at 9%, with a zero-rate applicable to taxable profits below AED 375,000.
• Taxable profits are calculated based on accounting principles generally accepted in the UAE (UAE GAAP) and International Financial Reporting Standards (IFRS). Certain income, such as dividends and capital gains, is exempt from corporate tax.
• Various deductions and credits available, such as those for direct and indirect business expenditures, research and development for business.
• Businesses must file corporate tax returns and pay tax annually.

For any business financial year which starts on or after the 1st of June 2023 will be subject to corporate tax the very same year. For example, if a company’s financial year starts on 1st August 2023 and ends on 31st July 2024, it will be subject to corporate tax from August 2023. This is because it would be the first financial year for the company after the CT regime.

On the other hand, if for instance a business’ financial year starts on 1st February 2023, it will only become subject to corporate tax the following year, i.e., 1st Feb 2024 to 31st Jan 2025.

As UAE’s business income taxes undergo continuous reforms, staying well-informed and compliant is crucial. Seeking guidance from a tax professional firm is the best way to navigate this evolving landscape.

Our corporate tax advisory services at Pro Services Tax Auditing go beyond conventional offerings. Our expert corporate tax consultants in the UAE assist our esteemed clients on matters such as Corporate Tax Registration, Filing CT Returns, and more. We also explain the latest regulations from the Federal Tax Authority, ensuring our clients are well-informed and can avoid corporate tax fines and penalties.

Dedicated to delivering excellence across all aspects of our services, our clients consistently affirm us as their top choice for a wide range of business requirements, especially Corporate Tax Services in the UAE. For swift assistance or any inquiries related to corporate tax, reach out to Pro Services Tax Auditing in Dubai today. Call us at +971563022779 or email info@professionalservices.ae, and rest assured, your queries will be promptly addressed.