Zero Corporate Tax Magic: Demystify the UAE Free Zone Corporate Tax
The United Arab Emirates (UAE), is unfolding within the Free Zone Corporate Tax regime. This new policy offers a tantalizing 0% Corporate Tax rate to eligible Free Zone companies and branches, provided they engage in specific activities. It's a golden opportunity for savvy businesses, but how does one qualify, and what does it mean to be a Free Zone Person in this context? Who Qualifies as a Free Zone Person? A Free Zone Person in the UAE is not just any business entity; it's a specific legal entity established under the unique rules of a Free Zone. This status isn't limited to local companies; branches of mainland UAE and foreign entities in a Free Zone also qualify. Even a foreign company relocating its incorporation to a UAE Free Zone can enjoy the privileges of being a Free Zone Person.
Those qualifying enjoy a 0% Corporate Tax rate on income from specified activities and transactions within Free Zones. However, certain activities may still attract the standard UAE Corporate Tax.
Operations Beyond Free Zones: Extending operations beyond the Free Zone could result in standard UAE Corporate Tax rates applying, although double tax treaties offer some relief.
Immovable Property Taxation: Income from property within a Free Zone is subject to a 9% Corporate Tax, especially in transactions with non-Free Zone Persons.
Qualifying Income and Activities: The Key to 0% Tax Understanding what constitutes Qualifying Income is crucial form UAE Freezone corporate tax perspective. It's typically revenue from transactions within the Free Zone network. Cabinet Decision No. 55 of 2023 outlines various activities eligible for tax relief, ranging from manufacturing to financial services.
What are the Qualifying Activities for freezones:
As outlined in Cabinet Decision No. 55 of 2023, Qualifying Activities eligible for the 0% Corporate Tax rate include:
1)Manufacturing of goods or materials.
2)Processing of goods or materials.
3)Holding of shares and other securities.
4)Ownership, management, and operation of Ships.
5)Reinsurance services subject to regulatory oversight.
6)Fund management services subject to regulatory oversight.
7)Wealth and investment management services subject to regulatory oversight.
8)Headquarter services to Related Parties.
9)Treasury and financing services to Related Parties.
10)Financing and leasing of Aircraft, including engines and rotable components.
11)Distribution of goods or materials in or from a Designated Zone to a customer for resale, processing, or alteration.
12)Logistics services.
13)Any activities ancillary to the above.
De Minimis Requirements:
To meet the de minimis requirements, non-qualifying revenue for a Qualifying Free Zone Person in a Tax Period should not exceed 5% of the total Revenue or AED 5,000,000, whichever is lower, as per Article (4) of Cabinet Decision No. 55 of 2023.
Qualifying Income Defined:
Qualifying Income, the linchpin for the 0% Corporate Tax rate, includes revenue from transactions with other Free Zone Persons and income from Qualifying activities. Excluded activities are expressly excluded from the definition
De Minimis Requirements:
To meet the de minimis requirements, non-qualifying revenue for a Qualifying Free Zone Person in a Tax Period should not exceed 5% of the total Revenue or AED 5,000,000, whichever is lower, as per Article (4) of Cabinet Decision No. 55 of 2023.
What’s the difference between a Designated Zone and a Free Zone?
A Designated Zone is a Free Zone that is recognized as a Designated Zone for UAE VAT purposes. Businesses considering establishing a distribution operation can benefit from locating in a Designated Zone. To be eligible for these benefits, look into business setup in a Dubai freezone that offers Designated Zone status.
Qualifying Free Zone Persons can benefit from the 0% Corporate Tax rate on income derived from the wholesale distribution of goods or materials (i.e., not to the
end consumer) from a Designated Zone to domestic and foreign businesses.
What is the relevance of being located in a Designated Zone for a distribution business?
A Qualifying Free Zone Person that is established in a Free Zone that is a Designated Zone can earn Qualifying Income from the wholesale distribution (i.e., not to the end consumer) of goods and materials to domestic and foreign businesses.
This option provides a brief introduction to business setup in Dubai freezones while targeting those interested in distribution businesses.
A Qualifying Free Zone Person
that is established in a Free Zone that is not a Designated Zone, on the other hand, can only earn Qualifying Income from the sale of goods and materials to other Free Zone Persons.
