Corporate Tax
Corporate tax on free zones has been significant in UAE corporate tax. Many papers have been published since the first corporate tax law was released in January 2022, however each of these guides made various claims. Finally, in May 2024, the Federal Tax Authority issued a guide for Free Zone Corporate Tax Persons that clarified all of the miscommunications in prior guides.
Here is the latest update on UAE Corporate Tax for Freezones
The UAE has introduced a new corporate tax system for all businesses and commercial activities in the country. This change aims to diversify the economy, reduce reliance on oil revenues, and create a sustainable financial system. The new corporate tax regime provides a clear and transparent tax environment for businesses in the UAE. It follows international tax standards, including the guidelines set by the Organisation for Economic Co-operation and Development (OECD). By adopting these standards, the UAE shows its commitment to fair tax practices and cooperation with the global tax community. This helps keep the UAE an attractive and competitive place for international businesses.
The new corporate tax regime will be implemented in stages. The announcement was made in January 2022, and the Federal Decree-Law No 47 of 22 (Corporate Tax Law) was issued in December 2022, and the amendment Federal Decree Law No.63 of 2023. The final update of UAE Corporate Tax for Free Zones was published on May 2024. The corporate tax will start for financial years beginning on or after June 1, 2023. For example, if a business's financial year starts on July 1, 2023, and ends on June 30, 2024, it will be subject to the new corporate tax from July 1, 2023. If a business's financial year follows the calendar year, it will be subject to the tax starting January 1, 2024. By following these timelines, businesses can prepare for the new tax requirements and take advantage of any tax planning opportunities.
According to Article 3 of the Corporate Tax Law, there will be two rates at which corporate tax will be applicable in the free zones:
There were several myths that Corporate Tax is not applicable in Free Zones, which is not true. It usually depends upon the nature of the income. The Freezone Corporate Tax may vary from 0% to 9%. So compliance is mandatory for Freezone Persons.
According to the law, a Freezone is “A designated and defined geographic area within the state that is specified in a decision issued by the cabinet at the suggestion of the minister”
All Free Zones in UAE qualify as Free Zones for Corporate Tax.
According to the law a Free Zone Person is “A Juridical Person incorporated, established or otherwise registered in a Free Zone, including a branch of a Non-registered Person registered in a Freezone.”
A legal entity that is established and incorporated in a free zone can be any of the following: public shareholding companies, public joint stock companies, limited liability partnerships (LLPs), funds structured as legal entities, branches of non-resident juridical persons, etc.
Cabinet Decision No. 55 of 2023: Ensuring Adequate Substance and Determining Qualifying Income
Cabinet Decision No. 55 of 2023 clarifies aspects of the corporate tax regime for businesses operating in free zones. This decision is important for defining what constitutes 'Qualifying Income' and ensuring businesses maintain adequate substance within the Free Zone.
Determining Qualifying Income
Cabinet Decision No. 55 of 2023 also plays a crucial role in defining 'Qualifying Income' under the new corporate tax regime. This decision specifies the types of income that free zone businesses can earn while still benefiting from the preferential 0% corporate tax rate.
Ministerial Decision No. 139 of 2023: Qualifying Activities and Excluded Activities
Ministerial Decision No. 139 of 2023 provides a comprehensive list of 'Qualifying Activities' and 'Excluded Activities' relevant to the free zone corporate tax regime. The decision outlines specific activities that are eligible for the 0% tax rate, which include:
Excluded activities, which are not eligible for the 0% tax rate, include:
In CT law, a qualifying free zone person is defined as a free zone individual who satisfies the criteria outlined in Article 18 of the law. These criteria include
To know more about Qualifying Free Zone Person, check out here.
For having Adequate Substance in UAE, two regulations needs to be followed
Outsourcing Activities
Outsourcing: Activities can be outsourced to a related party or a third party within the Free Zone, provided the Qualifying Free Zone Person maintains adequate supervision over the outsourced activities.
If a qualifying freezone person's non-qualifying income during a tax period does not surpass 5% of their total income for that tax period, or AED 5,000,000 (5 million dh), (whichever is lower), then the de-minimis requirement will be satisfied.
| Example 1 | Example 2 | |
| Total Revenue | 1,20,000,000 | 80,000,000 |
| 5% of Total Revenue | 6,000,000 | 4,000,000 |
| Threshold | 5,000,000 | 5,000,000 |
| Satisfies for De-Minimis Requirement | No | Yes |
To calculate the 5% in De-Minimis Requirement
(Non-Qualifying Income ÷ Total Income) × 100
To know more about De-Minimis Requirement, check out here.
Role of Free Zone Authorities in Confirming Eligibility
Free Zone Authorities play a crucial role in confirming the eligibility of entities for the free zone corporate tax regime. They are responsible for:
By working closely with Free Zone Authorities, entities can ensure that they meet the eligibility criteria for the free zone corporate tax regime and benefit from the associated tax incentives and advantages.
In the context of the UAE's Corporate Tax regime for free zones, it's essential to distinguish between Qualifying Activities, which can benefit from the 0% corporate tax rate, and Excluded Activities, which do not qualify for this preferential rate. Understanding these classifications helps businesses determine their eligibility and plan their operations accordingly.
Detailed List of Qualifying Activities
The UAE Ministry of Finance has specified a range of activities that are considered Qualifying Activities. These activities, when conducted exclusively within or from a free zone, are eligible for the 0% corporate tax rate. The main Qualifying Activities include:
Manufacturing of Goods or Materials:
Processing of Goods or Materials:
Holding of Shares and Other Securities:
Ownership, Management, and Operation of Ships:
Reinsurance Services:
Fund Management Services:
Wealth and Investment Management Services:
Headquarter Services to Related Parties:
Treasury and Financing Services to Related Parties:
Financing and Leasing of Aircraft:
Logistics Services:
Distribution in or from a Designated Zone:
Ancillary Activities:
List of Excluded Activities
Certain activities are explicitly excluded from the benefits of the Free Zone Corporate Tax regime. Income derived from these Excluded Activities will not qualify for the 0% tax rate, regardless of where they are performed. The main Excluded Activities include:
Transactions with Natural Persons:
Certain Financial Services:
Income from Intangible Assets:
Income from Immovable Property:
Businesses that earn income from Excluded Activities or any non-qualifying income will be subject to the regular UAE Corporate Tax regime, which includes a 9% tax rate on taxable income exceeding AED 375,000. also, failing to meet the qualifying conditions or the de minimis requirements (where non-qualifying revenue must not exceed 5% of total revenue or AED 5,000,000) will disqualify the entity from the free zone tax regime for a minimum period of five years.
Understanding the distinction between Qualifying and Excluded Activities is important for businesses operating in the UAE free zones to ensure compliance and optimize their tax obligations
Tho know more about Qualifying and Excluded Activities, check out here.
Businesses operating in the United Arab Emirates' free zones need to be familiar with the concept of qualifying income versus non-qualifying income under the Corporate Tax Law. This distinction significantly impacts their tax obligations.
Qualifying income refers to any earnings generated by a business with a Qualifying Free Zone Person (QFZP) status that benefits from a 0% corporate tax rate. This income must come from activities or transactions explicitly listed as qualifying and conducted entirely within the free zone. It's important to note that income from activities not on the approved list, such as banking or real estate, or transactions with entities outside the free zone (unless related to qualifying activities), does not qualify for the 0% tax rate.
In contrast, non-qualifying income means any earnings that fall outside the qualifying criteria. This includes income from non-approved activities, transactions with non-free zone entities that don't involve qualifying activities, and any income exceeding a specific threshold. The good news is that there's a slight buffer zone. Even with some non-qualifying income, QFZPs can still enjoy the 0% tax rate if it meets the de minimis rule as discussed earlier. This rule allows for a small amount of non-qualifying income, either less than 5% of the total revenue or under AED 5 million (whichever is lower).
In simpler terms, qualifying income translates to no corporate tax, while non-qualifying income generally gets taxed at 9%. However, the de minimis rule offers some leniency for QFZPs with minimal amounts of non-qualifying income.
This system creates a competitive tax environment, particularly for small and medium businesses, by offering a tax-exempt zone for a portion of their profits.
The UAE's corporate tax regime introduces new compliance and regulatory requirements for businesses, particularly those operating in free zones. Here's a breakdown of key aspects to ensure effective navigation of the system:
Freezone Corporate tax in the UAE is calculated based on the net profit reflected in the company's financial accounts. To file tax returns and determine the amount of Corporate Tax owed, maintaining specific financial documents is essential. Here are the documents needed to prepare for filing Corporate Tax in the UAE:
Corporations and businesses operating in UAE freezones must adhere to specific deadlines for filing Corporate Tax. Here is a detailed timeline to help ensure compliance:
| Task | Description | Deadline |
|---|---|---|
|
Tax Registration |
Register with the Federal Tax Authority (FTA) for Corporate Tax. |
Within 30 days of commencing business activities. |
|
Tax Return Submission |
Submit the annual Corporate Tax Return to the FTA. |
Within 9 months from the end of the financial year. |
|
Tax Payment |
Settle the payable Corporate Tax amount. |
Within 9 months from the end of the financial year |
|
Deregistration |
Submit a deregistration application if the business ceases operations. |
Within 30 days of ceasing business activities. |
|
Voluntary Disclosure |
Submit a voluntary disclosure for any errors in the Tax Return or Tax Assessment |
As soon as the error is discovered, preferably before notification of a Tax Audit |
|
Declaration Submission |
Submit any required declarations to the FTA |
As specified by the FTA, usually within the same timeframe as the Tax Return |
|
Notification of Change |
Inform the FTA of any changes requiring amendments to tax record information. |
Within 20 business days of the change occurring |
The UAE currently doesn't impose specific penalties related solely to the Free Zone corporate tax regime. However, the general UAE corporate tax framework outlines penalties for non-compliance that apply to both mainland and free zone businesses. Here's what you need to be aware of:
|
No. |
Description of Violation |
Administrative Penalty Amount in AED |
|
1 |
Failure to keep required records and other information specified in the Tax Procedures Law and Corporate Tax Law. |
10,000 for each violation; 20,000 for repeated violations within 24 months. |
|
2 |
Failure to submit tax-related data, records, and documents in Arabic to the Authority when requested. |
5,000 |
|
3 |
Failure to submit a deregistration application in the allowed period. |
1,000 monthly, up to 10,000 |
|
4 |
Failure to inform the Authority of changes requiring amendment of tax record information. |
1,000 monthly, up to 10,000 |
|
5 |
Failure of the Legal Representative to notify the Authority of their appointment within the specified timeframes. |
1,000 |
|
6 |
Failure of the Legal Representative to file a Tax Return within the specified timeframes. |
500 monthly for the first 12 months; 1,000 monthly thereafter. |
|
7 |
Failure of the Registrant to submit a Tax Return within the specified timeframe. |
500 monthly for the first 12 months; 1,000 monthly thereafter. |
|
8 |
Failure to settle the Payable Tax. |
14% per annum on the unsettled amount, calculated monthly. |
|
9 |
Submission of an incorrect Tax Return. |
500, unless corrected before the deadline. |
|
10 |
Submission of a Voluntary Disclosure for errors in the Tax Return or Tax Assessment. |
1% monthly on the Tax Difference, from the due date until the disclosure is submitted. |
|
11 |
Failure to submit a Voluntary Disclosure for errors before notification of a Tax Audit. |
15% fixed penalty on the Tax Difference; 1% monthly on the Tax Difference. |
|
12 |
Failure to facilitate the Tax Auditor during a Tax Audit. |
20,000 |
|
13 |
Late submission or failure to submit a Declaration to the Authority. |
500 monthly for the first 12 months; 1,000 monthly thereafter. |
The UAE's Corporate Tax Law offers exemptions for specific entities and income types. Here's a categorization to understand who qualifies for exemption:
Automatically Exempt Entities:
Entities Exempt Upon Notification:
Entities Requiring Application and Approval:
Freezone Corporate Tax in the UAE can be tricky, but it’s important to get it right. Filing your taxes on time and correctly helps avoid penalties and keeps your business running smoothly. Reyson Badger’s team is here to help you with every step, making sure you meet all the rules and requirements. With our full guidance , you can focus on growing your business while we handle your tax needs. Trust Reyson Badger to keep your tax matters in order, so you can achieve your business goals without any worries.