Corporate Tax in Dubai

Corporate Tax in Dubai: Key Aspects for Free Zone Persons

The Federal Decree-Law No. 47 of 2022, also known as the “Taxation of Corporations and Businesses (CT Law),” allows Free Zone Persons (FZP) to benefit from a 0% UAE corporate tax rate under specific conditions. To qualify as a Qualifying Free Zone Person (QFZP), an FZP must maintain adequate substance in the Free Zone, derive Qualifying Income, comply with Transfer Pricing regulations, and meet other specified requirements.

Non-compliance may result in disqualification as a QFZP for up to four consecutive Tax Periods. Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023 provide the regulatory framework for the implementation of Free Zone provisions. Recently, the Federal Tax Authority has issued a Comprehensive UAE Corporate Tax Guide on FZPs to further clarify the taxability of FZPs and address important aspects necessary for free zone businesses.

Key areas discussed in the guide include substance-related requirements, election period, computation mechanism, qualifying intellectual property, qualifying activities, and more.

What is a Free Zone Person (FZP)?

An FZP, or Free Zone Person, refers to a juridical person incorporated, established, or registered in a Free Zone, including a branch of a Non-Resident Person or a UAE juridical person registered in a Free Zone (e.g., a Branch of a Mainland Company incorporated in a Free Zone).

Conditions to become a QFZP

To qualify as a QFZP (Qualifying Free Zone Person), the Free Zone Person must fulfill all the conditions outlined in the UAE Corporate Tax Law and the Implementing Decisions.

Failure to meet all the conditions will result in the FZP losing its QFZP status, leading to its income becoming subject to the standard UAE Corporate Tax rules and rates. However, a FZP is considered a QFZP unless it fails to meet any of the conditions or if it elects to be subject to tax.

Tax Rates of Qualifying Free Zone Persons (QFZP)

A Qualifying Free Zone Person (QFZP) will be subject to UAE  Corporate Tax at the following rates:

  • 0% on Qualifying Income
  • 9% on Taxable Income that is not Qualifying Income

Determining Taxable Income that is not Qualifying Income

To determine the amount of Taxable Income that is not Qualifying Income, which will be subject to the 9% UAE Corporate Tax rate, a QFZP will need to:

  • Separate Revenue: Allocate the revenue in its Financial Statements into Revenue pertaining to the Qualifying Income component and to the Taxable Income component.
  • Expense Allocation: Allocate the expenses in its Financial Statements against those components in a reasonable manner, consistent with the arm’s length principle.
  • General Rules: Apply general rules for determining Taxable Income that is not Qualifying Income.

Understanding and adhering to these regulations is essential for QFZPs to ensure compliance and efficient tax management within the UAE.

Adequate Substance for Free Zone Persons

Maintaining adequate substance within a Free Zone is crucial for Free Zone Persons (FZPs) to comply with tax regulations and benefit from the 0% UAE corporate tax rate on Qualifying Income. Adequate substance is defined in relation to the presence of sufficient assets, full-time employees, and operational expenses within the Free Zone to conduct core income-generating activities.

These activities, such as manufacturing, production, warehousing, distribution, and research and development, must take place within the Free Zone to qualify for the favorable tax treatment. It’s important to note that maintaining adequate substance within the Free Zone, or a Designated Zone for distribution activities, must be sustained throughout the Tax Period.

FZPs may outsource core income-generating activities to other entities within a Free Zone, provided that they exercise adequate supervision over these outsourced activities. This involves implementing mechanisms to observe, oversee, assess, instruct, and guide the service provider to ensure the quality, quantity, and timeliness of the deliverables.

Determining adequate substance is contingent upon the nature and scale of the FZP’s business operations, and adherence to these requirements is essential for FZPs to maintain their favorable tax status within the UAE Free Zones.

Qualifying Income:

A Free Zone Person (FZP) must earn Qualifying Income from one or more of the following sources:

  1. Transactions with other FZPs, provided the recipient is the Beneficial Recipient of these transactions and they are not Excluded Activities.
  2. Transactions with a Non-Free Zone Person (NFZP) related to Qualifying Activities that are not Excluded Activities.
  3. Income derived from the ownership or exploitation of Qualifying Intellectual Property.
  4. Other Income, provided the FZP meets the de minimis requirement.

Understanding the Concept of Beneficial Recipient:

Transactions between a Qualifying Free Zone Person (QFZP) and another FZP are considered Qualifying Activities and Income only if the recipient is the beneficial owner of the services or goods.

An FZP is considered the Beneficial Recipient of services or goods if it has the right to use and enjoy the services or goods and is not obligated by contract or law to supply these services or goods to another person. If the recipient is acting as a conduit or intermediary (such as an agent or nominee) for a third party (including a related party or group entity), the Beneficial Recipient of the transaction is the third party, not the conduit or intermediary.

The seller or service provider FZP can rely on a written statement or undertaking from the purchaser or recipient confirming that they are the Beneficial Recipient and will use the services or goods for their Free Zone Business, unless the seller has reason to believe this representation may be incorrect (for instance, if the goods are to be delivered directly to a third party by the FZP seller).

Qualifying Activities:

If a Free Zone Person (FZP) sells services or goods to a Non-Free Zone Person (NFZP), the Qualifying Free Zone Person (QFZP) can benefit from the 0% UAE Corporate Tax rate if it earns Qualifying Income from transactions related to Qualifying Activities.

When determining Qualifying Activities, it is important to consider any Ancillary Activities conducted by the FZP. Activities necessary for performing the main Qualifying Activity, or those that make a minor contribution to the main activity and are so closely related to it that they cannot be regarded as separate activities, shall also be considered as Qualifying Activities due to their ancillary nature.

Key Qualifying Activities:

Manufacturing of Goods or Materials:

Manufacturing encompasses a broad range of activities, from product planning and production to quality control. This includes all stages from product conception, business planning, capital investment, R&D, input processing, output, and quality control. Improving or assembling pre-existing components also falls under manufacturing. Both full-fledged and contract manufacturing are included as Qualifying Activities. Activities that complement manufacturing naturally and integrally are considered ancillary. Post-sale activities like installation, warranty, maintenance, customer support services, and handling customer queries might be considered ancillary to manufacturing, whereas repairs are classified as a service.

Trading of Qualifying Commodity:

Qualifying Commodities are metals, minerals, energy, and agricultural commodities traded in raw form on a Recognized Commodities Exchange Market. Qualifying Activities include buying and selling these commodities. Ancillary activities include warehousing (storage or housing) and delivery of the Qualifying Commodity.

Holding of Shares and Other Securities for Investment Purposes:

Holding shares and other securities for investment purposes qualifies as a Qualifying Activity. This includes investment planning, buying and selling securities, and portfolio management. Securities are considered held for investment if they are held (or intended to be held) for at least 12 months. Activities such as deriving income from royalties or management fees, and active trading of shares and other securities, do not qualify.

Ownership, Management, and Operations of Ships:

Qualifying Activities include owning, managing, and operating ships used in international transportation of passengers, goods, or livestock, towing, providing general assistance to ships at sea, dredging activities, and leasing and chartering ships on a bareboat basis. This does not include ships used for local transportation, leisure, or recreational purposes, or those functioning as floating hotels, restaurants, or casinos.

Reinsurance Services:

Reinsurance services, as regulated under Federal Law No. 6 of 2007, qualify as a Qualifying Activity. This includes income from reinsurance premiums, underwriting fees, actuarial services, account management, salvage and subrogation recoveries, claim handling or management, and loss adjusting. Ancillary activities include investing, actuarial services, and risk management.

Fund Management Services:

Fund management involves managing a specific portfolio of investments on behalf of third-party investors, such as mutual funds, hedge funds, or pension funds. Qualifying Activities include investment planning and strategy, investment diversification, asset allocation, fund management, and performance monitoring. Ancillary activities may include financial advisory, training and education, financial planning, and technological support.

Wealth and Investment Management Services:

These services involve providing discretionary and non-discretionary investment management and advisory services, portfolio management, and wealth and investment advisory services. Qualifying Activities are subject to regulatory oversight in the UAE and include portfolio management, financial planning, and asset allocation. Ancillary activities may include risk management, market research, investment analysis, and family governance.

Headquarter Services to Related Parties:

This includes activities such as strategic decision-making, incurring operating expenditures on behalf of group entities, coordinating group activities, financial management, central procurement, human resource management, technical support, legal and compliance services, and intellectual property management. Ancillary activities may include training and development.

Treasury and Financing Services to Related Parties:

Treasury and financing services include cash and liquidity management, financing, debt management, financial risk management, and related advisory services to related parties. Activities such as cash management, risk management, investment management, and financing are included. Ancillary activities may involve centralized payment and collection activities.

Financing and Leasing of Aircraft:

This includes financing, leasing, and securitizing aircraft, aircraft engines, or rotable components. Activities include agreeing on funding terms, financing, acquiring the aircraft or components, setting terms and duration of financing or leasing, and lease management. Ancillary activities may include credit analysis, portfolio management, disposal or sale of aircraft or parts, and asset management.

Distribution of Goods or Materials in or from a Designated Zone:

Distribution involves transporting goods from the manufacturer, storing them, and selling them. This is a Qualifying Activity if it occurs in or from a Designated Zone and involves selling goods or materials to a person who resells, processes, or alters them for sale or resale.


Who is a Reseller?

A reseller is a customer who purchases goods or materials from a Free Zone Person (FZP) for the purpose of reselling them rather than using or consuming them directly. To qualify as a reseller, and thereby engage in a Qualifying Activity, a FZP must perform due diligence, such as conducting ‘know your client’ (KYC) checks and obtaining confirmation through an undertaking or contract, ensuring that the customer is not the end user.

Distribution to End Users

If goods are sold to a customer who uses or consumes them, that customer is considered an end user. Sales to end users by a FZP do not qualify as a Qualifying Activity.

High Sea Sales

High sea sales, or third port shipments, are considered a Qualifying Activity.

Logistics Services

Logistics services encompass the storage and transportation of goods on behalf of another person without taking ownership. This includes transportation, warehousing, inventory management, declaration and documentation, freight forwarding, order fulfillment, and packing. Ancillary activities such as supply chain management, customs brokerage, and customer service may also be considered part of logistics services.

Transactions with Natural Persons

Transactions with natural persons are generally treated as Excluded Activities and are not eligible for a 0% UAE corporate tax rate. Exceptions include transactions related to the ownership, management, and operation of ships, fund management services, wealth and investment management services, and financing and leasing of aircraft.

Tax Losses of QFZP

A Qualifying Free Zone Person (QFZP) cannot carry forward any losses incurred in relation to its Qualifying Income. However, tax losses incurred on the Taxable Income can be deducted against future Taxable Income. Losses incurred prior to the commencement of UAE Corporate Tax are not deductible.

Ineligibility for Certain Reliefs

QFZPs cannot claim the following reliefs under UAE Corporate Tax Law:

  • Small Business Relief
  • Qualifying Group Relief
  • Business Restructuring Relief
  • Ability to transfer or receive tax losses
  • Ability to be a member of a Tax Group

Compliance Requirements for QFZPs

QFZPs must:

  • Maintain all required records and documentation for 7 years following the end of the relevant tax period.
  • Obtain UAE Corporate Tax Registration.
  • Prepare financial statements according to IFRS or IFRS SME.
  • Prepare audited financial statements.
  • Maintain sufficient documentation to demonstrate the calculation of Qualifying Income.
  • Pay UAE Corporate Tax (if applicable) and file a Tax Return within 9 months from the end of the relevant tax period.

Key Takeaways and Conclusion

  • FZPs should verify with their respective Free Zone Authority whether they operate in a Free Zone or Designated Zone for UAE Corporate Tax purposes.
  • The Guide emphasizes maintaining adequate substance in the Free Zone/Designated Zone and ensuring core income-generating activities are performed there.
  • Enhanced documentation and record-keeping requirements are prescribed, including KYC and customer undertakings to verify reseller status in distribution activities.
  • For Non-Qualifying Income taxable at 9%, proper documentation must be maintained for the segregation of revenue and allocation of expenses between qualifying and non-qualifying income.
  • Continuous monitoring is necessary to ensure compliance with Free Zone conditions throughout the tax period.
  • QFZPs must undertake necessary compliance measures such as obtaining tax registration, ensuring Arm’s Length Principle for related party transactions, maintaining Transfer Pricing documentation, filing UAE corporate tax returns, conducting statutory audits, and keeping robust documentation for 7 years.

The UAE Corporate Tax  Guide on Free Zones provides comprehensive guidance on taxation issues related to Free Zones, including detailed explanations of Qualifying Activities and ancillary activities. It offers much-awaited clarifications on third port shipments, exports from the UAE, and the eligibility of Free Zone benefits for Free Zone branches of UAE Mainland Companies. Additionally, the Guide covers administrative aspects like the calculation of Qualifying and Non-Qualifying Income, splitting of expenses and revenue, and separate audit requirements for Non-Qualifying Income.

Given these guidelines, it is crucial to reassess and revisit tax positions to determine the eligibility for a 0% UAE corporate tax rate for all revenue streams.