The UAE Corporate Tax Law provides the legislative basis for imposing a Federal Tax on Corporations and Business profits.

Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“Corporate Tax Law”) was issued on 3rd October 2022 and in addition to that we have FTA guideline issued in May 2024 for Free Zone Persons.

Based on above guideline which is very comprehensive and containing 134 pages I have summarized few vital points in my article, but this guideline must be carefully reviewed in detail before making any decision.

Free Zones In UAE

We all know that UAE have many free zones in all the states and these zones play a critical role in driving economic growth in the UAE and internationally. Usually, these Zones offer Businesses benefits such as relaxed foreign ownership restrictions and the availability of additional legal entity forms and commercial activities. One can view the list of Designated Zones for VAT purposes provided by Cabinet Decision No. 59 of 2017 and it’s advised that all taxpayers should check with their respective Free Zone Authority to confirm if they operate in a Free Zone or Designated Zone for Corporate Tax purposes.

Tax Implications on Free Zone

UAE Corporate Tax rules enable Free Zone companies and branches that meet certain conditions to benefit from a zero percent Corporate Tax rate on certain Qualifying Activities and transactions. Before going further, one must know who a Free Zone Person is.

Free Zone Person

A Free Zone Person is a juridical person incorporated, established, or otherwise registered in a Free Zone including a branch of a Non-Resident Person or a UAE juridical person that is registered in a Free Zone.

A Person that is not a juridical person (i.e. an entity without a separate legal personality that is distinct from its owners or founders), such as an Unincorporated Partnership or a natural person, cannot be a Free Zone Person.

Qualified Free Zone Person – QFZP

There are certain conditions to be a QFZP, the Free Zone Person must meet all of the conditions required in the Corporate Tax Law and the implementing decisions, as set out in Sections 3.2.1 to 3.2.8. The Free Zone Person must meet all conditions as below.

• The regime is applicable to a Free Zone Person.
• The Free Zone Person must derive Qualifying Income.
• The Free Zone Person must maintain adequate substance in a Free Zone.
• The Free Zone Person must not have elected to be subject to the standard Corporate Tax rules and rates.
• The Free Zone Person must comply with the arm’s length principle and maintain Transfer Pricing documentation.
• The Free Zone Person must maintain audited Financial Statements.
• The non-qualifying Revenue must meet the de minimis requirements.

If a Free Zone Person does not meet all the conditions, it will no longer be a QFZP and its income will be subject to the standard Corporate Tax rules and rates. A Free Zone Person will be deemed to be a QFZP unless one of the conditions to be a QFZP is not met, or if the QFZP makes an election to be subject to tax.

Tax Rate for a QFZP

If the Free Zone Person meets all the conditions (including the de minimis requirements) to be a QFZP, it will be subject to Corporate Tax at the following rates:

• 0% on its Qualifying Income, and
• 9% on its Taxable Income that is not Qualifying Income.

A QFZP is not entitled to a 0% Corporate Tax rate on its first AED 375,000 of Taxable Income.

What is Considered a Qualifying Activity?

A Qualifying Free Zone Person can benefit from the 0% Corporate Tax rate if it derives Qualifying Income from transactions in respect of the following Qualifying Activities (even if such services or goods are sold to Non-Free Zone Persons):

• Manufacturing of goods or materials or Processing of goods or materials,
• Trading of Qualifying Commodities,
• Holding of shares and other securities for investment purposes,
• Ownership, management, and operation of Ships,
• Reinsurance services,
• Fund management services,
• Wealth and investment management services,
• Headquarter services to Related Parties,
• Treasury and financing services to Related Parties,
• Financing and leasing of Aircraft,
• Distribution of goods or materials in or from a Designated Zone, and
• Logistics services.

What is the De Minimis Rule?

If a QFZP generates both qualifying income as well as non-qualifying income then De Minimis Rule will apply. The UAE government does not list these activities as eligible for the 0% corporate tax rate. According to the rules, if the income you generate from non-qualifying activities is below the De Minimis amount, you can still avail 0% corporate tax rate on the total income but you must meet the threshold which is either 5% of your total revenue or AED 5 million, whichever is lower.

Taxation of a Free Zone Person that is not a QFZP

If a Free Zone Person does not meet the criteria to be a QFZP, the Free Zone Person will be subject to the standard Corporate Tax rates.

The standard rates are:

• 0% on Taxable Income up to AED 375,000, and
• 9% on Taxable Income exceeding AED 375,000.

Please also view my blog : https://accountingblogger.com/foreign-source-income-uae-tax/

Foreign Source Income Under UAE Corporate Tax ǀ Humayun Atif CMA, CPA  

Excluded Activities

Article 11 states many excluded activities such as transactions with natural persons and all transactions with natural persons are treated as Excluded Activities, except transactions in relation to the ownership, management and operation of Ships, fund management services, wealth and investment management services, and financing and leasing of Aircraft.

There are more excluded activities and article 11 may be referred.

Tax Registration

A Free Zone Person, including a Qualifying Free Zone Person, should register for Corporate Tax with the Federal Tax Authority (FTA) in the form and manner and within the timelines prescribed by the FTA in the FTA Decision No. 3 of 2024 and failure to do so will invite Administrative Penalties.

Records & Documents Keeping

A Free Zone Person shall maintain all records and documents for a period of 7 years following the end of the Tax Period to which they relate.

ABOUT THE AUTHOR

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is the author of the book ‘IFRS Made Easy’. He is a Tax and IFRS coach and the founder of accountingblogger.com