Corporate Tax for Free Zone Person

Starting from June 2023, a new tax policy will be implemented in the UAE, as introduced by the Federal Tax Authority (FTA) and the Ministry of Finance – Corporate Tax. Under this policy, Free Zone Businesses and Qualifying Free Zone Persons may be subjected to a corporate tax rate of either 0% or 9%, depending on their Qualifying income. On the other hand, Mainland Businesses operating outside the free zones will be subject to a standard tax rate of 9% on their taxable income, but only if it exceeds AED 375,000.

This new tax policy aims to create a distinction between businesses operating within free zones and those operating in the mainland. Free Zone Businesses and Qualifying Free Zone Persons will benefit from a potentially lower tax rate, while Mainland Businesses will be subject to the standard 9% tax rate, provided their taxable income exceeds AED 375,000.

Corporate Tax in Free Zones

Free zones are designated and officially recognized geographic areas within a country, established through Cabinet decisions or governmental regulations. In the case of the United Arab Emirates (UAE), specifically in Dubai and Abu Dhabi, there are several free zones in operation. These free zones have proven to be highly influential in attracting both multinational corporations and small to medium-sized enterprises.

One of the key advantages of operating within a free zone in the UAE is the ability for companies to establish 100% foreign-owned subsidiaries, without the requirement of a local or domestic shareholder. This provides international companies with greater control and flexibility in their operations within the country.

They benefit from a wide range of exemptions and incentives, including complete foreign ownership, customs and value-added tax (VAT) exemptions, full retention of capital and profits, as well as exemptions from corporate taxes. These incentives make free zones attractive destinations for businesses looking to establish a presence in the UAE, enabling them to operate under more favorable conditions and enhance their competitiveness.

Tax rates for Free Zones

The Ministry of Finance has acknowledged that businesses operating in Free Zones will be affected by the new Corporate Tax. However, it has been clarified that the tax incentives offered by the Free Zones will still be applicable under the new system, provided that businesses meet compliance requirements and do not engage in domestic transactions with companies or entrepreneurs based in the Mainland UAE.

Will Free Zones Be Affected by Corporate Tax?

The implementation of Corporate Tax in the UAE will have an impact on businesses operating in the free zones. However, free zone businesses that meet the regulatory requirements and exclusively operate within the free zones will be eligible for corporate tax benefits.

As part of the tax obligations, businesses in free zones are required to register themselves and fulfill the necessary corporate tax return filings in accordance with the applicable regulations.

According to the Federal Decree Law on Corporate Income Tax, the tax rates for Qualifying Free Zone Persons are as follows:

• 0% (zero percent) on Qualifying Income.
• 9% (nine percent) on Taxable Income that is not considered Qualifying Income.

The determination of Qualifying Income for a free zone person or entity is specified by the regulations set by the Federal Tax Authority (FTA). In contrast, businesses operating on the mainland will have their corporate tax calculated based on the taxable income they earn.

Who is a Qualifying Free Zone Person?

A Qualifying Free Zone Person, as defined in the Decree-Law, is a person who meets the requirements of a Free Zone Person and is subject to a Corporate Tax rate of 0% on their taxable income.

Conditions for Qualifying Free Zone Person

Article 18 of the Corporate Tax law outlines the conditions for a person to qualify as a Free Zone Person. These conditions are as follows:

1 A Qualifying Free Zone Person must meet the following requirements:

• Maintain sufficient substance within the country.
• Generate Qualifying Income as defined by a Cabinet decision based on the Minister’s recommendation.
• Choose not to be subject to Corporate Tax under this Decree-Law.
• Adhere to the Arm’s Length Principle and Transfer Pricing Documentation outlined in this Decree-Law.

2. If a Qualifying Free Zone Person fails to meet any of the above conditions during a Tax Period, they will cease to be a Qualifying Free Zone Person from the beginning of that Tax Period.

3. The Minister has the authority to determine the conditions or circumstances under which a person may continue or cease to be a Qualifying Free Zone Person as of a different date.

4. The tax rate of 9% on taxable income applies to a Qualifying Free Zone Person for the remaining tax incentive period specified in the relevant Free Zone legislation. This period may be extended according to conditions defined in a Cabinet decision based on the Minister’s suggestion, with a maximum duration of 50 years.

Corporate Tax Services for Free Zones

Accountant Foundry offers comprehensive assistance in legal compliance, tax advisory, and business consulting, specializing in corporate tax implementation for both mainland UAE and Free Zones. Our team possesses extensive knowledge and experience in all facets of corporate taxation.