UAE Corporate Tax on Free Zones
UAE is a desirable business region for overseas investors primarily due to its strategic location, progressive business policies, diversified talent pool, and tax-free environment in the Free Zones. Yet, as the country shifts away from an oil-dominated economy, UAE Corporate Tax on Free Zones is set to become a reality from June 2023.
How UAE Corporate Tax Applies to Free Zones?
The purpose of free trade zones in the UAE is to promote single-window management for international investors and to advance world trade. Businesses in UAE free zones can benefit from a 0% Corporate Tax rate on revenues from operations, as intended by free zone jurisdictions, provided they maintain a certain level of substance and adhere to all legal requirements, including:
- From transactions with establishments outside the UAE.
- From transactions with establishments in the same or other Free Zones.
- From the sale of merchandise by Free Zone enterprises in Designated Zones to mainland UAE importers.
- From "passive" income obtained from businesses in mainland UAE such as interest, royalties, dividends, and capital gains from owning shares.
You can also read: Guide to UAE Corporate Tax on State Sourced Income
While most Free Zone companies in the UAE enjoy a 0% corporate tax rate, some may still be subject to the standard 9% Corporate Tax rate. This includes:
- Transactions with mainland businesses.
- Income obtained by a Free Zone company with a branch on the UAE's mainland.
Choosing to be subject to regular Corporate Tax on Free Zone is a choice that a company may make at any moment, but once granted, it cannot revoke this status.
Qualifying Free Zone Person
The new Corporate Tax in UAE Law attempts to strike the right balance between Free Zone authorities honouring their corporate tax-exempt status. Thus, a category of "Qualifying Free Zone Person"—a company registered in a Free Zone—will be established under the Corporate Tax Law. It allows companies registered in a Free Zone to maintain their tax exemption on their Qualifying Income for the specified period mentioned in Free Zone legislation. The Cabinet can extend this period up to 50 years under the Corporation Tax Code.
A Free Zone Person is a juridical or legal person who is:
- Incorporated in the Free Zone
- Established in the Free Zone
- Registered in the Free Zone
The term also refers to a branch of a Non-Resident organization registered in the Free Zone.
A person would be regarded as a Qualified Free Zone Person if they met all of the requirements listed below:
- Maintain Adequate Economic Substance in UAE
- Derives "Qualifying Income" as outlined in a decision made by the Cabinet.
- Has not chosen to be subject to the corporate tax at standard rates.
- Complies with the transfer pricing requirements stated under the new corporate tax law.
When does a Person stop being a Qualifying Free Zone Person?
According to the UAE Corporate Tax Law, anyone who fails to meet the requirements (listed in Article 18 of the UAE CT Law) during a specific Tax Period or chooses to be subject to the standard Corporate Tax regime will cease to be a Qualifying Free Zone Person.
You can also read: How Is Corporate Tax Different From Value Added Tax In UAE?
For a very long time, free zones in the UAE have benefited from a wide range of exemptions, including 100% foreign ownership, 100% customs and VAT exemptions, 100% returns on capital and earnings, and corporation tax exemptions, to name a few. However, following the implementation of the new corporation tax, businesses operating in the free zones of the UAE will be required to register, file a corporate tax return, submit tax returns on an annual basis, and adhere to all other legal requirements. So, it is evident that corporate tax is applicable to free zones, and the tax rate may vary between zero percent or nine percent depending on the type of income.
Given that a new age of taxation is set to dawn on the UAE economic landscape, free zone enterprises should be aware of the major obstacles they must overcome. To understand complex tax principles and guarantee compliance, Free Zone enterprises could benefit from the expertise of corporate tax experts like CDA in Dubai. To assist you to find the best corporate tax solutions, our experienced team can assess the Corporate Tax requirements that apply to your business activities, and provide full-fledged regulatory, compliance, and tax consulting support to strengthen your company's standing in the UAE's business community.
For dependable tax solutions and enquiries on UAE corporate tax on free zones, contact the CDA professionals today.