Zero Corporate Tax Magic: Demystify the UAE Free Zone Corporate Tax

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.

The Path to Becoming a Qualifying Free Zone Person Becoming a Qualifying UAE Free Zone Corporate Tax Person is akin to unlocking a treasure chest of tax benefits. But it's not without its challenges. Companies must demonstrate a significant presence within a Free Zone, generate income classified as 'Qualifying Income', and comply with transfer pricing rules and arm's length principles. 1) Failing to meet these stringent conditions could mean missing out on the tax benefits for a considerable period. 2) Taxation of Qualifying Free Zone Persons in the UAE Corporate Tax Regime 3) Discover the taxation dynamics for Qualifying Free Zone Persons under the UAE Corporate Tax regime, unraveling the implications and exceptions: Corporate Tax Rate:
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.

 

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?

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.

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.

 

List of Designated zones in the UAE: Abu Dhabi • Free Trade Zone of Khalifa Port • Abu Dhabi Airport Free Zone • Khalifa Industrial Zone • Al Ain International Airport Free Zone • Al Butain International Airport Free Zone Dubai • JebelAli Free Zone (North-South) • Dubai Cars and Automotive Zone (DUCAMZ) • Dubai Textile City • Free Zone Area in Al Quoz • Free Zone Area in Al Qusais • Dubai Aviation City • Dubai Airport Free Zone • International Humanitarian City, Jebel Ali Sharjah • Hamriyah Free Zone • Sharjah Airport International Free Zone Ajman • Ajman Free Zone Umm Al Quwain • Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port • Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road Ras Al Khaimah • RAK Free Trade Zone • RAK Maritime City Free Zone • RAK Airport Free Zone Fujairah • Fujairah Free Zone • FOIZ (Fujairah Oil Industry Zone) FAQs: 1. Will a Free Zone Person be required to register and file a UAE Corporate Tax return? Yes. All Free Zone Persons will be required to register, obtain a Tax Registration Number, and file a Corporate Tax return, irrespective of whether they are a Qualifying Free Zone Person or not. 2. Are Free Zone Persons eligible to access double tax treaties? Relief from taxation under a double tax treaty is available only to persons who are a “resident” of one or both of the countries that are party to the relevant treaty. Residency is defined differently in double tax treaties, but typically requires a company or individual seeking treaty benefits to either be liable to tax, have a legal connection (e.g. incorporation), or economic connection (e.g. effective management or substantial presence) (or a combination thereof) in the relevant treaty country. UAE Free Zone Corporate Tax Person is a ‘Resident Person’ in the UAE for Corporate Tax purposes by virtue of being incorporated in the UAE, in the same way as any other UAE company. A Qualifying Free Zone Person is also ‘liable to tax’ in the UAE, albeit at a 0% on its Qualifying Income. The ability to benefit from double tax treaties is also subject to other conditions and would need to be assessed on a case by case basis taking into account all relevant facts and circumstances and the specific conditions of the applicable double tax treaty.

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    It is crucial to comprehend the distinction between obtaining a license with a visa quota and acquiring residency in the UAE. A license with a visa quota solely covers the expenses related to a business license and visa quota, with the possibility of including a Flexi office lease in certain Freezones. However, possessing a visa quota does not automatically grant you UAE residency; additional steps must be completed. If you wish to apply for a partner/investor visa, there are supplementary costs involved. These include obtaining an immigration card, registering for E-channel (NE Only), and paying fees for visa, visa processing, medical examination and Emirates ID typing. To effectively plan your business expenses, it is imperative to ask the right questions from the beginning to avoid surprises and hidden costs.