January 18, 2023

Corporate Tax for UAE Free Zone

Introduction

According to the recent law changes in UAE, specifically, Federal-Decree Law no.47 2022, corporations including free zone entities are soon going to be taxable in UAE. As per the law, businesses will be liable to corporate tax from the beginning of their financial year, starting on or after 1st June 2023.

What?

Corporate tax (CT) is a direct tax that applies to the business’s net taxable income. The general rate of CT in the UAE would be 9%.

Why?

The imposition of corporate tax will enable UAE to achieve its strategic objectives through investments in development and innovation. Furthermore, through an extensive network of double taxation treaties between the UAE and other countries, UAE will position itself as a leading global hub for businesses.

How?

Federal Tax Authority (FTA) will be responsible for the collection and enforcement of CT. However, further information on the collection, due dates, and procedures will be available soon.

The case of UAE free zone persons (FZPs); the impact of corporate tax:

Generally, the standard corporate tax rate is 0% for taxable income of up to AED 375,000 and 9% for taxable income above AED 375,000. Free zone persons (a.k.a. Free zone companies or Free zone entities) will continue to get the incentives the UAE government has been offering. However, these companies should comply with the regulations and not conduct business in the UAE’s Mainland. FZPs can enjoy a preferential CT rate of 0% on their qualifying income. The following tax rates will apply to FZPs:

 

FZP – CT Rate – 0% – for up to AED 375,000 taxable income

FZP – CT Rate – 9% for over AED 375,000 taxable income

Qualifying Free zone Person (QFZP) – CT Rate – 0% on whole qualifying income

 

What is a qualifying free zone person (QFZP)?

To qualify as QFZP, the business shall satisfy the following conditions:

1) Adequate manpower, assets, and income-generating activities are carried out in UAE. Furthermore, the business should be managed and controlled in the UAE.

2) The business should earn qualifying income.

3) The entity has not made an election to opt out of the free zone tax regime.

4) Transfer pricing rules and documentation are met.

If any of the above conditions are not met, standard corporate tax rates should apply from the beginning of the financial year when the business failed to meet the requirements or opted out of the FZ tax regime.

What is a qualifying income?

Qualifying income is income derived by the FZP through transactions with businesses located outside the UAE, within the same free zone, or any other free zone in the UAE. If a non-passive income is derived from UAE’s mainland, then the income sourced from the mainland will be subject to standard tax rates. However, the remaining income will be subject to a 0% rate. A passive income derived from owning shares, royalties, or capital gains through investing in mainland companies will be subject to a 0% tax.

Impact of intercompany transactions on QFZPs:

There would be a 0% tax rate for transactions between QFZPs and their related group companies in the mainland area. However, a mainland company’s payments to an FZE will not be a deductible expense. This will maintain UAE’s position as a global hub for business while maintaining neutrality in corporate tax in such transactions.

Filing Requirements for free zone companies:

Even if the free zone company is designated as a QFZP, the need to file for corporate tax will remain the same. Furthermore, free zone persons need to have audited financial statements to benefit from the preferential 0% rate.

Conclusion:

Free zone companies are considered similar to other companies in the UAE for tax purposes. However, there are certain rules where a free zone company can opt for a preferential 0% rate, termed QFZP. To qualify as QFZP, the business should have adequate substance in UAE, opt for a free zone tax regime, and earn qualifying income. Qualifying income is the revenue generated from transactions with free zone companies within the UAE region and any company outside the UAE. A QFZP will have to file for corporate tax in any case with audited financial statements.

 *a business, company, or entity can be termed as a person for taxable purposes.

How can we help?

A lot of UAE businesses will face a difficult journey across unfamiliar terrain as they prepare for, and comply with, the new federal corporate income tax. Despite much ambiguity, UAE Corporate Tax will affect business plans, strategies, and legal agreements.

As your local experts, we know what you can expect from the final law and how it will affect the operation of your entire business. Taking advantage of tax relief is one of the most important things your UAE business can do to survive and thrive. And Creative Zone Tax & Accounting can certainly help with that!

Tax Experts at Creative Zone Tax & Accounting can help your UAE business take advantage of tax relief.