UAE Corporate Tax | All You Need To Know About The Tax Implications On Free Zones

Tally Solutions | Updated on: April 19, 2023

The UAE corporate tax implication on Free Zone Persons is different from that of a juridical person or an individual. Here is all you need to know about Free Zone Persons, how they differ from the other categories of taxpayers, and how they can benefit from the corporate tax regime.

How is Corporate Tax in UAE Calculated?

Corporate Tax Limit and Applicability in UAE

Who all are qualified as Free Zone Persons?

Every person who is conducting business in a Free Zone is automatically a Free Zone person. However, in order to be a qualified Free Zone Person, all the conditions below must be met. Even if one condition is not met, then the Free Zone Person will not qualify Free Zone Person. 

  • The entity must have and maintain sufficient substance in the UAE. This means he is carrying out business activities in the jurisdiction of the UAE instead of only registering for tax-related reasons.
  • He is earning “Qualifying Income” that will be specified by the Cabinet Decision.
  • He complies with transfer pricing rules and is maintaining the related transfer pricing documentation.
  • He has not elected to pay the corporate tax in full.

The Minister may add more conditions to this list, so it is a good idea to check the Ministry of Finance website for additional details as more information can be added in the future. 

What does qualifying income mean?

As per the CT regime, the 0% CT rate will be applicable on qualifying income, while a 9% CT rate will be applicable on the taxable income that does not qualify as the qualifying income for Qualifying Free Zone Persons as per the CT regime. The qualifying income has not been specified by law, and the Cabinet Decision of the CT regime is yet to release a decree for the same.

What are the advantages of free zones?

More than 40 free zones exist in the UAE, and they have numerous advantages. Free zones enable you to have complete ownership of your company, and the Free Zone authorities keep your assets-related information confidential. Free zone companies are not bound by trade barriers and can trade easily regardless of whether they are dealing with other free zone companies. Free zones are safe from import duties and corporate taxes, meaning you can import without paying any customs duties.

Free zone companies enjoy complete repatriation benefits as they can transfer their assets to foreign countries without any issues. These companies have developed business communities and have faster business setting-up procedures.

Will Free Zone Persons be taxed under the UAE corporate tax?

A person who meets all conditions to become a Qualifying Free Zone Person will be taxed a 0% UAE corporate tax rate on their qualifying income and a 9% corporate tax rate on their taxable income that does not meet the definition of qualifying income. This means they will be taxed under the UAE corporate tax, although they will be paying a 0% rate on the qualifying income and 9% rate on the taxable income above their qualifying income. 

Can a Free Zone Person enjoy the 0% corporate tax rate?

Yes, a Free Zone Person can enjoy a 0% corporate tax rate provided they have not elected to pay the standard UAE corporate tax rate of 9%. The process occurs automatically when a person meets the eligibility requirements to become a qualifying Free Zone Person. Note that, he will be subject to pay the 9% corporate tax rate on taxable income that does not come under the qualifying income.  

Is a Free Zone company required to register and file the corporate tax return?

Yes, Free Zone entities must register by going to the Federal Tax Authority (FTA) website and following the instructions provided. This is true even if an entity does not qualify as a Free Zone Person but operates in a Free Zone. Similarly, such a company needs to file the corporate tax return as specified by the corporate tax regime regardless of whether he is eligible for the qualifying income rates or not.

Will the corporate tax be different for those entities which fall under a financial Free Zone?

No, it will be the same as both entities will have the same rules and regulations applied to them when it comes to UAE corporate tax. They can enjoy the 0% or 9% corporate tax rate if they specifically elect themselves. If a business is operating in the Free Zone, then it must meet the conditions and become a Qualifying Free Zone Person before they can enjoy the 0% tax rate.

What will be the tax rate for a Free Zone Person with a mainland branch?

The Free Zone Person will be required to pay the regular corporate tax rate of 9% if he has a branch in the mainland, provided that the taxable income is generated in the mainland. But, if he is a qualifying Free Zone Person, he can benefit from the 0% corporate tax rate when the taxable income comes from the Free Zone area, provided that he is maintaining two books of accounts; one for Free Zone and one for the mainland. If that is not the case, then the Free Zone Person is expected to pay a 9% corporate tax on both the Free Zone income and the mainland income.

What is the tax rate for Free Zone Persons trading with the mainland without a branch?

Even if not having a mainland branch, Free Zone Persons can perform transactions with another company (or companies) currently operating in the mainland UAE. When this occurs, the Free Zone Person can continue to pay a 0% UAE corporate tax rate if the income generated from the mainland UAE is categorized under passive income. This includes capital gains, royalties, dividends, and so on. 

How will the transactions with group companies be taxed?

It depends on the nature of the transaction and the way the transaction is taking place. For example, if the mainland group company sends payments to a Free Zone Person, it is not a deductible expense. The 0% UAE corporate tax rate will hold when transactions between the mainland UAE companies and the Free Zone Persons take place. This makes tax application simpler and seamless.

Can a Free Zone Person be disqualified from a 0% tax rate?

Yes, it is possible. If any conditions that qualify the Free Zone Person are no longer true, then the Free Zone Person will likely be disqualified from the 0% corporate tax rate. If a Free Zone Person earns income apart from the income earned on the mainland, it will disqualify the entity from the 0% corporate tax regime as he will be required to pay the standard 9% corporate tax. Other factors of disqualification may be specified in the future.

Can a Free Zone Person elect the regular tax rate of 9%?

Yes, a Free Zone Person can choose to elect the regular UAE corporate tax rate of 9% in the UAE instead of enjoying the 0% corporate tax rate. This may be subject to some rules as some experts have suggested that such an election may be irreversible. This means the change can take place only once, so it is best to thoroughly think through how much corporate tax your company is willing to pay. The Ministry of Finance website may update information about the same in the future if any new conditions are added or changed.

Will withholding tax apply to a Free Zone Person’s income?

Withholding tax or pay-as-you-go is when the tax is withheld at the source rather than being deducted later. The party that collects the tax transfers it directly to the government. When a Free Zone Person benefits from a 0% corporate tax regime on the income he earns from the mainland UAE, the withholding tax can apply at a 0% corporate tax rate.

Should a Free Zone Person submit audited financial statements?

Yes, a Free Zone Person must submit audited financial statements when he submits his corporate tax returns. This will enable him to avail the 0% UAE corporate tax rate on his qualifying income. Auditing is done by analyzing and inspecting the books of accounts of a business. It ensures no errors are found in the generation of accounting statements and is free from fraud.

Will Free Zone entities be subject to global minimum tax rules?

The Pillar Two rules have not been added to the current UAE corporate tax regime. Qualifying Free Zone entities that come under large multinational groups can have a different corporate tax rate but this will only be confirmed when the Pillar Two rules have been added to the corporate tax regime. This information is likely to be shown in the Ministry of Finance FAQs section.

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