In terms of Corporate tax for UAE free zone companies have a distinct tax implication compared to juridical persons or individuals in the UAE. It is important to understand the differences between these categories of taxpayers and how Free Zone Persons can take advantage of the corporate tax system. Below is a comprehensive guide on Free Zone Persons and their tax implications.
What are the criteria for an entity to be considered a qualified Free Zone Person?
To be considered a qualified Free Zone Person, certain conditions must be met. While conducting business in a Free Zone automatically makes one a Free Zone Person, meeting all the following requirements is necessary to qualify:
- The entity must have and maintain sufficient substance within the UAE and conduct business activities in the jurisdiction, not solely register for tax purposes.
- The entity must earn “Qualifying Income” as defined by the Cabinet Decision.
- The entity must comply with transfer pricing rules and maintain relevant transfer pricing documentation.
- The entity must not elect to pay corporate tax in full.
It is important to note that the Minister may add more conditions to this list, so staying updated by checking the Ministry of Finance website for additional details is recommended.
What is meant by “qualifying income” under the CT regime?
“Qualifying income” refers to the type of income that is subject to a 0% corporate tax rate under the CT regime. For Qualifying Free Zone Persons, any income that does not qualify as “qualifying income” will be subject to a 9% corporate tax rate. However, the exact definition of “qualifying income” has not yet been specified by law, and a decree from the Cabinet Decision of the CT regime is expected to clarify this.
What are the advantages of free zones?
Free zones offer several benefits, including complete ownership of your company, confidentiality of assets-related information, easy trading with other free zone companies, exemption from import duties and corporate taxes, repatriation benefits, and faster business setting-up procedures.
- Free zones allow for complete ownership of your company.
- Assets-related information is kept confidential by Free Zone authorities.
- Free zone companies are not bound by trade barriers, making trading easier regardless of whether they are dealing with other free zone companies or not.
- Free zones are exempt from import duties and corporate taxes, allowing for imports without paying customs duties.
- Free zone companies have complete repatriation benefits, allowing for easy transfer of assets to foreign countries.
- Business communities within free zones have developed, providing networking opportunities for businesses.
- Faster business setting-up procedures are available in free zones.
Will persons in Free Zones be subject to UAE corporate tax?
Yes, persons in Free Zones may be subject to UAE corporate tax depending on their status as a Qualifying Free Zone Person. If they meet the conditions to be considered a Qualifying Free Zone Person, they will be taxed at a 0% rate on their qualifying income and a 9% rate on any taxable income that does not meet the definition of qualifying income. Therefore, they will be subject to the UAE corporate tax, but with favorable tax rates on their qualifying income.
Is it possible for a Free Zone Person to benefit from a 0% corporate tax rate?
Yes, a Free Zone Person can benefit from a 0% corporate tax rate if they meet the eligibility requirements to become a qualifying Free Zone Person and have not chosen to pay the standard UAE corporate tax rate of 9%. Once they meet the conditions, they will automatically receive the 0% rate on their qualifying income. However, they will still be subject to the 9% corporate tax rate on any taxable income that does not meet the definition of qualifying income.
Is a company in a Free Zone obligated to register and file a corporate tax return?
Yes, companies operating in Free Zones are required to register with the Federal Tax Authority (FTA) and file a corporate tax return, regardless of whether they qualify as a Free Zone Person or not. This applies to all companies operating in Free Zones, and they must follow the guidelines specified by the corporate tax regime, including filing a tax return, even if they are not eligible for the qualifying income rates.
Is the corporate tax rate different for entities operating in financial Free Zones compared to other Free Zones in the UAE?
No, the corporate tax rate is the same for entities operating in financial Free Zones and other Free Zones in the UAE. The same rules and regulations apply, and entities can elect to pay either the 0% or 9% corporate tax rate, depending on whether they qualify as a Qualifying Free Zone Person. To benefit from the 0% tax rate, a business operating in a Free Zone must meet the eligibility requirements to become a Qualifying Free Zone Person.
For Free Zone Persons trading with the mainland without a branch, what is the applicable tax rate?
Free Zone Persons can conduct transactions with companies operating in the mainland UAE, even without having a mainland branch. If the income generated from these transactions is considered passive income, such as capital gains, royalties, and dividends, the Free Zone Person can continue to pay a 0% corporate tax rate. However, if the income is considered active income, the Free Zone Person will be subject to the standard 9% corporate tax rate.
Is it necessary for a Free Zone Person to submit audited financial statements?
Yes, it is mandatory for a Free Zone Person to submit audited financial statements along with their corporate tax returns. This is necessary to be eligible for the 0% corporate tax rate on their qualifying income in the UAE. Auditing involves scrutinizing the accounting records of a business to ensure there are no errors or fraudulent activities. By submitting audited financial statements, a Free Zone Person can demonstrate their compliance with tax regulations and help ensure accurate reporting of their financial activities.
Will Free Zone entities be affected by the global minimum tax rules?
Currently, Free Zone entities in the UAE are not subject to the global minimum tax rules outlined in Pillar Two of the international tax reform framework. However, it is possible that qualifying Free Zone entities belonging to large multinational groups could face a different corporate tax rate when the Pillar Two rules are implemented in the UAE’s corporate tax regime.
ESR and Free Zone Persons: Unclear Impact on UAE’s Corporate Tax Regime
The current impact of the UAE corporate tax (CT) regime on Free Zone Persons who engage in “Relevant Activities” and must demonstrate sufficient economic substance in the UAE is unclear. The Law does not address whether Free Zone Persons will need to comply with annual notification and reporting requirements.
The Economic Substance Regulation (ESR) was introduced to prevent multinational organizations from artificially shifting profits from high tax jurisdictions to low or no tax jurisdictions and align with international tax standards. Since the statutory CT rate in the UAE is 9%, it is expected that UAE businesses may no longer need to comply with Economic Substance Requirements. However, Free Zone Persons who still benefit from the 0% CT rate may still be subject to ESR regulations.
Maximize Your Tax Savings with Elevate – UAE Corporate Tax Consultants
Managing corporate tax obligations can be complex and time-consuming for free zone companies in the UAE. However, with the guidance and expertise of qualified corporate tax consultants in Dubai, such as Elevate Auditing, businesses can stay compliant with the regulations and maximize tax savings. Elevate’s team of experienced professionals provides tailored solutions to meet the unique needs of each client, ensuring that they can focus on their core business activities while leaving the tax complexities to the experts. For free zone companies in the UAE seeking reliable and efficient corporate tax consultancy services, Elevate Auditing is a trusted partner.