Impact Of Corporate Tax On Free Zone Entities In UAE 

With the introduction of Corporate Tax in UAE, starting a business in the UAE will have several tax implications now. Corporations, including free zone businesses, will soon be taxed in the UAE, according to recent legislation revisions in the UAE under Federal-Decree legislation No. 47 of 2022.

According to the Decree, firms will be subject to corporation tax beginning with their fiscal year beginning on or after June 1, 2023. 

Here’s all you need to know about Free Zone Persons, how they vary from other types of taxpayers, and how they might take advantage of the corporate tax structure.

Understanding the Corporate Taxes in UAE

Corporate tax (CT) is also known as a direct tax, which is levied on a company’s net taxable profits. Corporate taxation will allow the UAE to fulfill its strategic goals by investing in growth and innovation. 

Furthermore, the UAE will establish itself as a prominent global corporate hub through an extensive network of double taxation treaties between the UAE and other nations.  With effect from 01st June 2023, UAE’s overall CT rate would be 9% over taxable profits of AED 375,000.

CT will be collected and enforced by the Federal Tax Authority (FTA). More information about the collection, due dates, and processes, on the other hand, will be available soon.

Categorization Between Taxable, Exempt & Qualifying Free Zone Person?

Corporate Tax

Businesses will be classified as Taxable, Exempt, or Qualifying Free Zone Persons (QFZP) under the new regime, and must determine whether they fit into one of these categories and register appropriately. Certain exempt entities are nevertheless required to apply for and gain permission.

In this section, we will look at each of these three groups and how the new corporation tax policy affects them:

Taxable Person

A taxable person shall be either a resident or non-resident person:

1- Resident person:

  • A resident person is a juridical person incorporated/established/recognized in the state, including a person from a free zone, or a person from a foreign jurisdiction who is effectively managed and controlled in the state.
  • A common person, who is doing a business or any related activity in the state.

2- Non-resident person

  • A non-resident who has a permanent establishment in the state, receives state-sourced revenue, or has a link in the state, as determined by Cabinet Decision.
  • Any branch or premise under the state of a Person will be considered as taxable entity.

Exempt Person

Certain exemptions are granted automatically, either by cabinet decision or upon application, as follows:

Automatically exempt:

  • A cabinet resolution (yet to be published) will specify government entities and government-controlled entities.
  • Extractive and non-extractive natural resource firms are exempt upon notice to the UAE Ministry of Finance.

If listed in a Cabinet Decision (yet to be published), they are exempt. – Entities that qualify for Public Benefit.

If you apply to and are authorized by the Federal Tax Authority, you may be exempt:

  • Pension and social security funds, whether public or private
  • Investment funds that qualify
  • Exempt individuals’ wholly owned and controlled UAE subsidiaries.

Qualifying free zone person

To qualify for the 0% corporation tax rate, a person in a free zone must satisfy the following criteria:

  • Maintain sufficient substance in the UAE
  • Derives qualified revenue (as stated in a future cabinet decision)
  • Has not chosen to be subject to the 9% CT
  • Complies with relevant transfer pricing regulations.
  • Free Zone Qualifying Zone Individuals that satisfy the criteria must pay tax at the following rates:
  • 0% on qualified earnings
  • 9% on taxable income that does not fit the criterion of qualified income.

Who all are qualified as Free Zone Persons?

Everyone who does business in a Free Zone is immediately a Free Zone resident. To be a qualified Free Zone Person, however, all of the qualifications listed below must be satisfied. Even if one requirement is not satisfied, he or she will not be eligible to be a Free Zone Person. 

The entity must have and keep enough substance in the UAE. This suggests he or she is conducting business in the UAE rather than simply registering for tax purposes.

  • He or she is earning “Qualifying Income” as defined by Cabinet Decision.
  • He or she follows transfer price guidelines and keeps the necessary transfer pricing documents.
  • He or she has chosen not to pay the business tax in full.

Because the Minister may add more requirements to this list, it is a good idea to monitor the Ministry of Finance website for further information in the future. 

Final Words

Qualifying income is defined as revenue derived from transactions with free zone firms in the UAE territory as well as any company located outside of the UAE. In any event, a qualifying free zone resident must submit for corporate tax.

For tax reasons, free-zone firms are treated the same as other corporations in the UAE. However, there are some restrictions under which a free zone corporation, known as a qualified free zone person, is subject to a preferential 0% rate.

To qualify, the company must have sufficient substance in the UAE, not opt out of the free zone tax framework, and make qualifying income. 

How can Aristotle Tax Consultancy help you?

Corporate Tax

Many firms with operations in the UAE will find it difficult to prepare for and comply with the new federal corporation tax framework. As June approaches, not all aspects of the regime have been revealed.

If you are having difficulty with your preparations, Aristotle Tax Consultancy’s local experts can already provide you with a solid understanding of what to expect from the implementation of the tax regime and what it will mean for the operation and administration of your business in the UAE.

Our experts are well-versed in directing your business through corporate and finance management challenges by overcoming them without hassle. We keep the interaction and understanding smooth throughout the journey. You just need to share your core business needs, and leave everything else to us!