A Comprehensive Handbook on Corporate Tax in Free Zones of the UAE

Conditions for Free Zone Persons

  • Article No. 18 of Corporate Tax (CT) Law
  • Public Consultation on Free Zone
  • Cabinet Decision No. 100 of 2023
  • Ministerial Decision No. 265 of 2023

Introduction:

The UAE has long been known as a tax-free haven, attracting investors and entrepreneurs worldwide. However, to ensure sustainable economic growth and contribute to the country’s development, the UAE has transitioned from a tax-free environment to a Corporate Tax system.

The Federal Decree-Law No. 47/2022 on the Taxation of Corporations and Businesses, effective June 1, 2023, marks a significant shift in the UAE’s economic landscape.

This article provides a comprehensive guide to corporate taxation in UAE Free Zone areas, with a specific focus on Corporate Tax and its impact on Free Zone Persons.

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Significance of Free Zones in UAE

In recent years, free zone areas have gained prominence as strategic business locations due to the numerous incentives they offer to companies. These zones provide businesses with a range of benefits, including:

– 100% Foreign Ownership: Companies can fully own their businesses without needing a local partner.
 Exemption from Import and Export Duties: Goods can move freely without additional taxes, reducing operational costs.
– Tax Advantages: Free zones often offer various tax incentives, including exemptions from certain types of taxes.

However, it is crucial for companies operating in free zone areas to have a comprehensive understanding of the corporate tax regulations in place. Ensuring compliance with these regulations is essential for maximizing the available advantages and avoiding potential penalties.

Definition of Free Zones Persons in UAE

Understanding the comprehensive Corporate Tax framework in UAE Free Zones involves distinguishing between two key categories of persons: Natural Persons and Juridical Persons. This differentiation is critical for grasping the tax obligations and benefits applicable to entities operating within UAE Free Zones.

Natural Persons
Natural Persons refer to individuals who independently operate businesses, including freelancers, sole establishments, and civil companies. Despite conducting business from a Free Zone, these individuals are not recognized as Free Zone Persons under UAE Corporate Tax laws.

Juridical Persons
Juridical Persons encompass corporate entities, such as Limited Liability Companies (LLCs). These entities can achieve the status of Free Zone Persons if they are incorporated within a Free Zone, thereby enjoying specific tax benefits and obligations under the UAE Corporate Tax system.

Corporate Tax Rates for Free Zone Companies:

Corporate Tax rates for Free Zone Persons differ based on their classification, delineated as follows:

 Qualifying Free Zone Person (QFZP)
A QFZP stands to benefit from distinct tax advantages, notably enjoying a 0% tax rate on qualifying income. These entities meet specific conditions enabling them to access favorable tax treatment.

 Non-Qualifying Free Zone Person (NQFZP)
NQFZPs fail to satisfy the requisite criteria for QFZP status, thus foregoing the associated tax benefits. As a result, they may not avail themselves of the same tax advantages afforded to QFZPs.

Criteria for Qualifying Free Zone Person (QFZP)

To qualify as a QFZP, entities must adhere to specific conditions outlined below:

  • Entities must demonstrate substantial presence in the UAE, including core income-generating activities, tangible assets, qualified workforce, and requisite operational expenditures.
  •  Income must fall under the category of “Qualifying Income” as defined in Cabinet Decision No. 55 of 2023.
  •  QFZPs must refrain from opting for the 9% tax rate, instead enjoying preferential tax treatment.
  • Entities must adhere to arm’s length principles and transfer pricing regulations.
  •  QFZPs must meet additional conditions stipulated in Cabinet Decision No. 139 of 2023.

Types of Business Activities and Their Taxability in Free Zones

In Free Zones, business activities are categorized into three groups for tax purposes:

1. Qualifying Activities: These are specific activities listed in Cabinet Decision No. 139 of 2023. Businesses engaged in these activities may enjoy tax benefits or exemptions.

2. Excluded Activities: Activities listed in the Cabinet Decision that may not qualify for the same tax benefits or exemptions as Qualifying Activities.

3. Other Activities: Business activities not explicitly listed as Qualifying or Excluded fall into this category. Tax implications are determined based on their nature and relevant tax regulations.

Categories of Qualifying Income

Qualifying Income is classified based on transaction nature and involved parties:

1.Transactions with Other Free Zone Persons: All transactions’ income, except from Excluded Activities, qualifies.

2. Transactions with Non-Free Zone Persons: Income from Qualifying Activities only qualifies; Excluded Activities do not.

3. Income from Other Transactions: May qualify if it meets de minimis requirements.

4. Tax on Accountable Income to Establishments: Income from Domestic or Foreign Permanent Establishments is taxed at 9%.

Additional Condition for Free Zone Persons:

Ministerial Decision No. 265 of 2023 specifies two additional conditions that Free Zone Persons must comply with:

– Non-qualifying revenues must not exceed the de-minimis requirements.
– Prepare Audited Financial Statements in accordance with the Law.

Failure to meet any of these requirements will result in the loss of Qualifying Free Zone Person status from the start of the relevant Tax Period and for the next four Tax Periods.

Taxation of Income from Immovable Property in Free Zones

Income from immovable property in Free Zones is taxed at varying rates based on property type and involved parties:

– Income from commercial property

– Dealing with Non-Free Zone Persons: Taxed at 9%.

– Dealing with Free Zone Persons: Considered Qualifying Income and taxed at 0%.

– Income from non-commercial property: Taxed at 9%, irrespective of involved parties.

Understanding the De Minimis Rule

The De Minimis Rule outlines conditions for Qualifying Free Zone Persons (QFZPs) regarding their Non-Qualifying Revenue. To achieve QFZP status:

– Non-Qualifying Revenue: Includes income from Excluded Activities and non-Qualifying Activities with Non-Free Zone Persons.

– Total Revenue: Encompasses all income generated by a QFZP in a tax period.

QFZPs must ensure that their Non-Qualifying Revenue is less than the lower of:
– 5% of their Total Revenue, or
– AED 5 million.

Exclusions from Non-Qualifying & Total Revenue

Several types of revenue are excluded from calculations for both Non-Qualifying and Total Revenue:

– Revenue from immovable property in a Free Zone from certain transactions.

– Revenue from a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person.

Simplify your path with Uncorn Global Solutions

Simplify your journey through the dynamic landscape of UAE’s Corporate Tax with Unicorn Global Solutions. As your reliable companion, we streamline every step, from corporate tax registration to compliance, ensuring a seamless experience. Leveraging our expertise in the latest Corporate Tax Law and the intuitive Emara Tax platform, we make navigating the process effortless. 

Count on Unicorn Global Solutions for a streamlined approach, enabling informed decisions and fostering enduring financial prosperity. Our dedication to compliance ensures your peace of mind, while our mission revolves around your success. Opt for Unicorn Global Solutions, where complexities vanish, and tailored success awaits you. Text us on WhatsApp or call us today.

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