For years, the Free Zones in the UAE have been a haven for businesses, offering several benefits such as 100% foreign ownership, duty exemptions, and attractive tax benefits. The introduction of the UAE’s new free zone corporate tax regime, effective from June 1, 2023, has changed the taxation scenario of businesses in the Free Zone jurisdiction.
With the introduction of the Federal Decree-Law No. 47, there has become a clear separation between Qualifying and Non-Qualifying Free Zone Persons under specific corporate tax obligations. Qualifying Free Zone Persons can still benefit from a 0% tax. On the other hand, non-qualified free zone persons are taxed at 9%.
This article explains the new corporate tax law in Dubai Free Zones, covering eligibility criteria, qualifying income, and tax rates. It also highlights compliance requirements and how businesses can maximize tax benefits while avoiding penalties. At Now Consultant, our tax experts simplify this process to help you meet regulations while maximizing your tax advantages.
Overview Of The New Corporate Tax Law:
The Federal Corporate Tax, introduced under Federal Decree-Law No. 47 of 2022, came into effect on June 1, 2023. The following are the corporate tax rates in the Free Zone in the UAE under this framework:
- 0% Tax Rate: Qualifying Free Zone Persons (QFZPs), meeting criteria such as adequate substance, qualifying income, and compliance with transfer pricing and economic substance regulations, can still benefit from a 0% tax rate on certain income types, such as exports and high-sea sales.
- 9% Tax Rate: Businesses that generate non-qualifying income or fail to meet the QFZP criteria are taxed at 9% on profits exceeding AED 375,000.
This dual-rate structure balances attracting global investment with supporting the UAE’s broader economic goals.
Who Qualifies As a “Person” Under UAE Tax Law?
Under UAE tax regulations, it is important to understand the term “Person.” This classification determines your obligations under corporate tax laws.
- Natural Persons: These include freelancers, sole proprietors, or civil companies. While operating in a Free Zone, you are still subject to corporate tax on income, often at the same rates as mainland businesses.
- Juridical Persons: These include corporations and partnerships that meet qualifying criteria. These businesses are eligible for the 0% corporate tax rate on qualifying income, provided they meet the eligibility requirements below.
What Is a Qualifying Free Zone Person In UAE?
The qualifying persons are those who fulfill the following eligibility criteria:
Eligibility Criteria
To claim the status of a Qualifying Free Zone Person (QFZP) and enjoy a 0% tax rate on qualifying income, businesses must meet the following conditions:
- Adequate Substance: Physical presence in the UAE, such as offices and employees in the Free Zone.
- Generate Qualifying Income: This includes revenue derived from approved business activities within Free Zones or with international entities.
- Opt-Out of Standard Tax Rates: Businesses must not choose to be taxed under the default corporate tax rates.
- De Minimis Rule Compliance: Non-qualifying income must not exceed 5% of total revenue or AED 5 million, whichever is lower.
- Audited Financial Statements: Must align with International Financial Reporting Standards (IFRS).
- Adherence to Additional Free Zone Conditions: Follow specific requirements outlined by the governing Free Zone authority.
Non-Qualifying Free Zone Persons
Businesses that fail to meet the above criteria or derive earnings from excluded activities are classified as Non-Qualifying Free Zone Persons (NQFZPs). The businesses are taxed 9% on profits over AED 375,000 and do not benefit from the 0% rate.
What Activities Are Considered “Qualifying Activities”?
Business activities under Cabinet Decision No. 265 are categorized into three types: Qualifying Activities, Excluded Activities, and Other Activities. Each category carries unique tax implications and is dealt with by the relevant regulatory authority. Only Qualifying Activities are eligible for Free Zone tax relief. These include:
- Manufacturing and processing goods or materials.
- Trading of qualifying commodities.
- Ownership and management of ships.
- Reinsurance, fund management, and wealth management services.
- Treasury and financing services for related parties.
- Logistics services, including the distribution of goods in/from designated zones.
Understanding Qualifying Income In UAE Free Zones:
Qualifying income refers to revenue generated from specific activities within a Free Zone that are eligible for a 0% corporate tax rate. The following are considered as the qualifying income in Free Zones:
- Transactions Between Free Zone Entities: Revenue generated within or among Free Zone businesses qualifies.
- International Revenue: Income gained from transactions with overseas clients or markets.
- Income from all other transactions: All other income, provided they satisfy the de minimis requirements, can be considered as qualifying income.
It is important to understand the difference between qualifying and non-qualifying income in your records to remain compliant and maximize tax benefits.
Non-Qualifying Income and the De Minimis Tax Rule:
Non-qualifying income includes revenue earned from activities not recognized as qualifying or derived from the UAE mainland. These include:
- Profits from mainland sales exceeding permissible limits.
- Non-compliant business activities.
De Minimis Rule:
The De Minimis Rule allows Free Zone businesses to earn a small percentage of non-qualifying income without losing their preferential tax treatment. Currently, the threshold is set at 5% of total revenue or AED 5 million, whichever is lower. Exceeding these thresholds reclassifies your status, subjecting all income to the 9% tax rate.
Impact of Corporate Tax on Free Zone Businesses
The introduction of corporate tax has long-lasting impacts on your businesses in Dubai Free Zones. If you do not qualify for 0% corporate tax, you have to face a significant tax burden. While the 0% incentive remains a key attraction, companies must adapt to new compliance standards, including:
- Annual financial reporting and audits.
- Understand the difference between qualifying and non-qualifying income.
- Filing tax returns within nine months of the financial year-end.
Failure to comply can result in substantial fines, undermining the financial benefits of operating in a Free Zone.
FAQs:
What Is The Corporate Tax Rate For Businesses In Dubai Free Zones?
Qualifying Free Zone Persons benefit from a 0% tax rate on qualifying income. Non-Qualifying Free Zone Persons are subject to a 9% corporate tax on profits exceeding AED 375,000.
Can a Free Zone Person Operate In The Mainland and Still Benefit From a 0% Tax Rate?
No. Income generated from mainland UAE transactions is considered non-qualifying and is taxed at the 9% rate, regardless of Free Zone status.
Are Free Zone Companies Exempted From Corporate Tax In UAE?
Free zone companies in the UAE are generally exempt from corporate tax if they meet specific conditions, such as earning qualifying income and adhering to regulatory requirements. However, exemptions may not apply to non-qualifying income or activities outside the free zone.
Do Free Zone Companies Need To Register For Corporate Tax?
Yes, Free Zone Companies In The UAE Must Register For Corporate Tax, Even If They Are Eligible For Exemptions, To Comply With Legal Regulations.
How Can We Help You?
It can be difficult to meet the requirements for a 0% corporate tax rate and identify qualifying income in Dubai Free Zones. At Now Consultant, we specialize in helping businesses comply with free zone corporate tax laws while maximizing the tax benefits that are available to you.
Our team of experts supports you every step of the way to achieve tax reductions while ensuring compliance with the latest UAE regulations. We assist in managing your cash flow, maximizing available tax deductions, and registering your free zone business for corporate tax.
