Corporate tax in the United Arab Emirates (UAE) is a relatively new concept, with the Federal Decree-Law No. 47 of 2022 introducing a corporate tax regime in the country for the first time. The new tax law will come into effect on June 1, 2023, and will apply to all businesses and commercial activities conducted in the UAE, except for those operating in designated free zones. This article aims to provide an in-depth analysis of corporate tax for Dubai Free Zone Person.
Contents
What is a Free Zone in UAE?
Free zones are designated geographic areas within the UAE that have separate economic and customs regulations from the rest of the country. Some key facts about free zones in the UAE include:
- There are over 40 free zones across the seven emirates that make up the UAE.
- Major free zones include the Dubai International Financial Centre (DIFC), Dubai Multi Commodities Centre (DMCC), and Abu Dhabi Global Market (ADGM).
- A Qualifying Free Zone Person enjoys 0% corporate tax rate on “Qualifying Income” derived from conducting business activities within the free zone.
- Companies registered in free zones benefit from 100% foreign ownership, 100% repatriation of capital and profits and 100% exemption from customs duty among other emirates tax exemptions.
- Employees of free zones companies are also eligible for a UAE tax free salary if their employment is related to the free zones business activity.
- Free zones aim to attract foreign direct investment by providing a business-friendly environment.
UAE Corporate Tax Qualifying Free Zone Person
A Qualifying Free Zone Person is a Free Zone Person that meets all of the following conditions:
- Maintains adequate substance in the Free Zone.
- Derives Qualifying Income.
- Has not elected to be subject to Corporate Tax.
- Complies with arm’s length principle and transfer pricing rules and documentation requirements.
- Prepare and maintain audited financial statements
This means that companies that do not meet these criteria will not be considered free zone persons and will be subject to corporate tax on their profits.
UAE Corporate Tax Free Zone Qualifying Income
Under the new Corporate Tax regime, Free Zone Persons can benefit from a 0% Corporate Tax rate on their Qualifying Income. Qualifying Income is defined as income derived from transactions with other Free Zone Persons and domestic and foreign sourced income from any of the ‘Qualifying Activities’.
The Qualifying activities include:
- manufacturing of goods or materials
- processing of goods or materials
- holding of shares and other securities
- ownership, management and operation of ships
- reinsurance services that are subject to the regulatory oversight of the competent authority in the state
- fund management services that are subject to the regulatory oversight of the competent authority in the state
- wealth and investment management services that are subject to the regulatory oversight of the competent authority in the state
- headquarter services to related parties
- treasury and financing services to related parties
- financing and leasing of aircraft, including engines and rotable components
- distribution of goods or materials in or from a designated zone to a customer that resells such goods or materials, or parts thereof, or processes or alters such goods or materials or parts thereof for the purposes of sale or resale
- logistics services and
- any activities that are ancillary to the activities listed above.
It is important to note that Free Zone Persons are still required to register for Corporate Tax and file annual returns, even if they only have Qualifying Income.
UAE Corporate Tax 2023 Free Zone
The new Corporate Tax regime applies to all Free Zone Persons in the UAE from June 1, 2023. Free Zone Persons are required to register for Corporate Tax and file annual returns, even if they only have Qualifying Income. The Corporate Tax rate for Qualifying Income is 0%, while the Corporate Tax rate for non-Qualifying Income is 9%.
Corporate Tax Dubai Free Zone Person
Under the new UAE corporate tax regime effective 2023, entities registered as a ‘Qualifying Free Zone Person’ in Dubai free zones may benefit from preferential tax treatment.
Some key points regarding the corporate tax implications for Dubai free zone persons include:
- To qualify as a ‘Qualifying Free Zone Person’, the entity must be registered and conducting an eligible business activity within a designated Dubai free zone such as DIFC, DMCC, etc.
- A Qualifying Free Zone Person in Dubai pays 0% corporate tax on ‘Qualifying Income’ earned from conducting eligible activities within the Dubai free zone for an initial period of 50 years.
- Qualifying Income includes revenues from qualified business activities that are sufficiently connected to the Dubai free zones. It excludes non-business income like capital gains, etc.
- The 0% tax rate benefit can be extended beyond the initial 50 year period if approved by the UAE Cabinet.
- Holding companies set up within certain Dubai free zones may also enjoy tax exemptions under participation privilege rules.
- Proper registration and documentation must be maintained to claim preferential free zone tax treatment under the new tax regime.
Conclusion:
In conclusion, the introduction of corporate tax in the UAE, including Dubai’s free zones, is a significant development that businesses need to be aware of. While the benefits of the Free Zone Corporate Tax regime will continue to apply, it is essential to understand the conditions that must be met to qualify for these benefits. Companies operating in free zones should seek professional advice from tax agents in Dubai like Farahat and co. to ensure they are compliant with the new regulations and can take advantage of any available tax incentives. With the right guidance, businesses can navigate the complexities of the new corporate tax regime and continue to thrive in the UAE’s dynamic business environment.
FAQS
1. What is the difference between Free Zones and Designated Free Zones in the UAE?
A Free Zone is a designated area in the UAE where businesses can operate under special regulations and enjoy benefits such as 100% foreign ownership, tax exemptions, and customs duty exemptions. A Designated Free Zone, on the other hand, is a Free Zone that is recognized as a Designated Zone for UAE VAT purposes.
2. Is there corporate tax on free zones in the UAE?
Currently, free zone companies in the UAE are exempt from corporate tax, meaning they do not have to pay any taxes on their profits. However, the benefits of the Free Zone Corporate Tax regime may expire by no later than the end of the tax incentive period stated in the legislation of the relevant Free Zone, unless such period is extended by means of a Cabinet Decision issued in accordance with Article 18 of the Corporate Tax Law.
3. What is a free zone in Dubai?
A free zone in Dubai is a designated area where businesses can operate under special tax, customs, and import regulations. These zones offer benefits such as 100% foreign ownership, exemption from corporate and personal income taxes, and streamlined business setup processes. Each free zone has its own regulations and focuses on specific industries, such as technology, media, finance, and logistics. Examples of free zones in Dubai include Dubai International Financial Centre (DIFC), Dubai Multi Commodities Centre (DMCC), Dubai Airport Freezone (DAFZ) etc.
