The implementation of 9% Corporate tax in UAE , with exemption for the various free zones that operate its economy, generally tax-free oil producers attempts to grow non-oil revenue and maintain its status as a regional commercial hub.
The corporate tax comes on top of a 5% VAT implemented in 2018, steadily reducing the tax-free status of UAE , which has helped it carve out a role as a global trade and tourism powerhouse.
As the new regulations put forward , the Ministry of Finance made it clear qualifying entities of more than 30 free zones in the UAE , which export millions of dollars to nearby nations, will be subject to a 0% rate, even when dealing with the mainland on certain strategic activities such as manufacturing, goods processing, and logistics services.
UAE Corporate Tax in Freezone
When the Dubai Corporate Tax regime became official on January 31, 2022, the UAE Ministry of Finance (MoF) mentioned that tax incentives will always be honoured given to businesses in UAE Free Zones Following that, on 28 April 2022, a Public Consultation Document became available, which revealed insights of the new federal tax law while making it obvious that entities in Free Zones would be subject to Corporate Tax and would be obliged to register under the previous regime and file tax returns. They would, however, be entitled for a 0% Corporate Tax rate if they met the necessary standards for maintaining substance and complying with the specific Free Zone legislation.
According to the document, the following income of Free Zone residents would be subject to 0% Corporate Tax :-
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Income from outside the UAE or from other Free Zones
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Passive revenue from mainland businesses (royals, interest, etc.)
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Income from mainland network firms is subject to expense refusal in the hands of mainland enterprises.
Provisions for a Free Zone person under the final Corporate Tax law
Finally the MoF of UAE adopted the final version of the Corporate Tax law on December 9, 2022. A Free Zone person is included in the definition of taxable individuals under the final Corporate Tax law. Furthermore, the advantageous tax regime would only apply to eligible Free Zone residents generating qualifying income.
According to Article 18 of the final law, a qualifying Free Zone person is a Free Zone entity that:
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Maintains sufficient substance.
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Obtains qualified revenue as defined.
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Complies with the law's transfer pricing provisions.
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Has not elected to be subject to Corporate Tax and meets any other requirements that may be imposed.
Important Considerations for Free Zone Residents in the UAE
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A Free Zone resident may choose to be charged according to standard laws.
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Persons operating in a free zone would be required to follow the separate but equal principle and keep proper transfer pricing documentation detailing transactions with related parties and connected persons.
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Considering the exception is only available once, Free Zone is particularly those that are part of larger groupings, would have to carefully weigh the benefits and drawbacks of opting out.
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Given that the income of a Free Zone would be organised as Qualified Income and Other Income, it is critical for enterprises to have an appropriate breakdown/allocation of expenses incurred for earning qualifying income and other income.
The free zones in the UAE attract a substantial amount of foreign investment. As a result, the implementation of UAE Corporate Tax law for Free Zone residents has been kept logical. However, restrictions on group tax reliefs and prospective taxation of transactions with the mainland could deter investors, especially given the UAE's recent opening to Foreign Direct Investment.