How Corporate Tax affects Free Zone Persons/Companies?

Starting June 2023, certain businesses in Free Zones might have to pay either 0% or 9% corporate tax based on their income. This change comes from the Federal Tax Authority and the Ministry of Finance. Mainland businesses will stick to a 9% tax rate if their taxable income exceeds AED 375,000. The UAE is getting ready for these adjustments.

UAE has specific areas called Free Zones in cities like Dubai and Abu Dhabi. These zones attract lots of companies, both big and small, because they offer benefits like full foreign ownership and tax exemptions.

Companies in Free Zones have been crucial for international trade, enjoying benefits such as no corporate taxes and customs and VAT exemptions. This new law is part of the UAE's plan to boost its economy by offering these tax breaks to certain Free Zones.

But, these tax exemptions might affect other laws like the Economic Substance Regulations (ESR). Officials are still figuring out how to adjust the ESR after these new tax laws kick in

Tax rates in Free Zones

The Ministry of Finance said that companies in Free Zones will be affected by the new Corporate Tax in the UAE. However, businesses that follow the rules and only operate within Free Zones, without doing business with companies or entrepreneurs in the rest of the UAE, will still get the tax benefits offered by the Free Zones.

Do Free Zones Have to Pay Corporate Tax?

Yes, businesses in Free Zones will be subject to Corporate Tax. But those that follow the rules and only operate within Free Zones, without doing business in the rest of the UAE, will still enjoy the tax benefits.

Free Zones in the UAE must register and file corporate tax returns.

According to the rules in the Federal Decree Law on Corporate Income Tax:

• If you're a Qualifying Free Zone Person, you won't have to pay any Corporate Tax on the income that qualifies.
• But if some of your income doesn't qualify, you'll need to pay a 9% tax on that part.
• The exact types of income that qualify for this benefit are decided by the regulations of the FTA. However, for businesses operating outside the free zones (on Mainland), the corporate tax is figured out based on how much taxable income the business makes.

Who is a Qualifying Free Zone Person?

A Qualifying Free Zone Person is someone who fits specific qualifications established in the legislation and is subject to a Corporate Tax rate of zero percent on their taxable income.

Conditions for Qualifying Free Zone Person

A Qualifying Free Zone Person must fulfill all these conditions:

• Maintain enough presence in the country.
• Earn income that meets specific criteria set by the government.
• Choose not to be taxed under this particular law.
• Follow the Arm’s Length Principle and Transfer Pricing Documentation rules.
• If a Qualifying Free Zone Person doesn't meet any of these conditions during a tax period, they'll lose their status as a Qualifying Free Zone Person from the beginning of that period.

 If someone doesn't meet the criteria, the Minister can decide when they stop being a Qualifying Free Zone Person.

The 9% tax rate applies to the taxable income of a Qualifying Free Zone Person for the remaining period of the tax incentive specified in the Free Zone's laws. This period can be extended up to 50 years based on government decisions.

For more information contact Reyson Badger Accounting Services in Dubai.           

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