Navigating the UAE's Corporate Tax regulations can be complex, especially for businesses operating in Free Zones. With the introduction of the UAE Corporate Tax Law, it’s essential for companies to understand the specific provisions applicable to Free Zone Persons. In this guide, we will break down the tax regulations for Free Zone Persons, Qualifying Income, and compliance requirements, all with a focus on the UAE region.
This guide is designed for businesses, professionals, and juridical persons operating in UAE Free Zones, or those interested in the unique tax benefits and regulations that apply to Free Zone Persons under the UAE Corporate Tax Law.
What Is a Free Zone Person?
A Free Zone Person refers to a juridical person that is incorporated, established, or registered in a Free Zone. This includes:
- Free Zone authorities
- Government-controlled entities established in Free Zones
- Branches of non-resident juridical persons or UAE resident juridical persons registered within Free Zones
Notably, natural persons and unincorporated partnerships are not considered Free Zone Persons.
Key Tax Benefits for Free Zone Persons
Under the UAE Corporate Tax Law, a Qualifying Free Zone Person enjoys a 0% Corporate Tax rate on Qualifying Income. However, income not categorized as Qualifying Income is subject to the standard Corporate Tax rate of 9%.
It is important to note that Free Zone Persons are not eligible for the 0% Corporate Tax rate on taxable income up to AED 375,000; this entire taxable income will instead be taxed at the 9% rate if it is not Qualifying Income.
What Is a Free Zone for Corporate Tax Purposes?
For tax purposes, a Free Zone is a designated geographical area specified by a decision from the UAE Cabinet. It may also be a Designated Zone, which aligns with the definitions in Federal Decree-Law No. 8 of 2017 on Value Added Tax (VAT).
To verify if your business operates within a designated Free Zone for Corporate Tax purposes, always consult with your respective Free Zone Authority.
Qualifying Free Zone Person: Conditions & Compliance
To maintain a 0% Corporate Tax rate on Qualifying Income, a Free Zone Person must meet the following conditions:
- Maintain adequate substance within the Free Zone.
- Derive income that is classified as Qualifying Income.
- Not elect to be subject to the standard Corporate Tax rate.
- Comply with the arm’s length principle for related-party transactions.
- Keep Transfer Pricing documentation and maintain audited financial statements.
- Ensure non-qualifying revenue does not exceed the lower of AED 5 million or 5% of total revenue.
Failing to meet these conditions or electing to follow standard Corporate Tax rules will result in the Free Zone Person losing their Qualifying status for five tax periods.
Understanding Qualifying Income and Excluded Activities
Qualifying Free Zone Persons benefit from a 0% Corporate Tax rate on income derived from certain Qualifying Activities, including:
- Manufacturing and processing of goods
- Trading of Qualifying Commodities
- Investment management services
- Treasury and financing services to Related Parties
- Leasing and financing of aircraft
- Logistics services within a Designated Zone
However, income from Excluded Activities is subject to the standard 9% Corporate Tax rate. Excluded Activities include transactions with natural persons (except in certain regulated services), banking, non-reinsurance insurance activities, and the ownership of immovable property (other than commercial property in Free Zones).
Compliance Requirements for Free Zone Persons
Staying compliant with UAE Corporate Tax regulations is crucial. Here are some key obligations for Free Zone Persons:
- Tax Registration: All Free Zone Persons must register for Corporate Tax with the Federal Tax Authority (FTA) and adhere to prescribed timelines.
- Audited Financial Statements: Even if revenue is below AED 50 million, a Qualifying Free Zone Person must maintain audited financial statements.
- Tax Return Filing: Free Zone Persons must file their Corporate Tax return and make any required payments within nine months from the end of the relevant tax period.
- Record Maintenance: Free Zone Persons must keep all financial records and documents for seven years after the end of the tax period.
Conclusion
For businesses operating within UAE Free Zones, the Corporate Tax Law offers substantial benefits, particularly the 0% tax rate on Qualifying Income. However, strict compliance is necessary to maintain these advantages. By understanding the distinctions between Qualifying and Excluded Activities, and ensuring adherence to the outlined conditions, Free Zone Persons can optimize their tax obligations in the UAE.
Stay informed and consult with your Free Zone Authority or tax advisor to ensure your business remains compliant and benefits fully from the UAE’s corporate tax framework.