Taxation of Free Zone Person
Based on their qualifying earnings, Free Zone Businesses and Qualifying Free Zone Persons may be subject to a corporate tax of 0% or 9% as of June 2023. However, Mainland Businesses that had taxable income over AED 375,000 were subject to a standard 9% tax rate. The Federal Tax Authority (FTA) and the Ministry of Finance have introduced a new tax policy called Corporate Tax in the UAE, which will be implemented nationwide in June 2023.
The corporate tax rate in the UAE is 9% by law. We discuss the tax system in the United Arab Emirates in this session, including an examination of how corporate tax affects companies operating in both the Mainland and the Free Zone.
UAE Corporate Tax in Free Zones
A Cabinet decision, taken at the Minister’s request, designates a free zone as a recognized and defined geographic area inside the state. There are several Free Zones in the United Arab Emirates, namely the Emirates of Dubai and Abu Dhabi. The majority of free zones have an impact on businesses, and many multinational corporations as well as small and medium-sized businesses have registered subsidiaries that are 100% foreign-owned and independent of domestic shareholders.
The majority of UAE corporate tax 2024 Free Zone businesses are regarded as essential drivers of global trade. Numerous benefits are available to free zones, including 100% foreign ownership, 100% exemptions from customs and VAT, 100% returns on capital and profits, and exemptions from corporate tax.
The UAE government may now achieve its goal of economic changes through growth due to the new Corporate Tax Law, which acts as a multiplier by ensuring that certain Free Zones’ tax exemptions are met.
Requirements for tax exemptions in Free Zones may conflict with other features of the current legislation, such as how they affect the Economic Substance Regulations (ESR). Regarding future modifications to the UAE ESR when corporate taxes are implemented, that is still up for debate.
Tax rates for Free Zones
Businesses registered in Free Zones would be impacted by the new Corporate Tax in the United Arab Emirates, according to the Ministry of Finance. However, it was noted that the new system would respect the tax breaks offered by the Free Zones for enterprises that fulfill the compliance criteria and refrain from doing domestic business with entrepreneurs or companies in the Mainland of the United Arab Emirates.
Businesses operating in the United Arab Emirates’ free zones will be impacted by corporate tax. Nevertheless, companies operating in free zones that comply with regulations and do not conduct business in the United Arab Emirates’ mainland would benefit from lower corporation taxes.
UAE Free Zones must register and submit their company returns.
A qualifying free zone person is required to pay corporate tax at the following rates under the Federal Decree Law on Corporate Income Tax:
1. The qualifying income is 0% (zero percent).
2. Taxable income that is not qualifying income is subject to a 9% (nine percent) tax.
The FTA regulations specify and identify the particular qualifying income for an individual or company operating in a free zone. On the other hand, the corporation tax becomes more exact for businesses operating on the Mainland and is determined by the taxable income the company generates.
Who Qualifies for the Free Zone? A person who meets the requirements of this Decree-Law to be a Free Zone Person qualifies as a qualifying free zone person and is subject to corporate tax of 0% taxable income.
Requirements for Persons in Free Zone Qualification
Let’s examine Article 18 of the Corporate Tax Law, which outlines the prerequisites for becoming a Qualifying Free Zone Person, below.
1. A Free Zone That Qualifies Person satisfies each of the following requirements:
• Preserves sufficient substance within the State.
• Receives Qualifying Income as determined by a Cabinet decision made at the Minister’s recommendation.
• Has not chosen to be governed by this decree-law and be subject to corporate tax.
• Observes the Transfer Pricing Documentation of this Decree-Law and the Arm’s Length Principle
- At the beginning of each Tax Period, a Qualifying Free Zone Person loses their status as such if they are unable to meet any of the requirements mentioned above.
- If an individual doesn’t meet the above requirements, the Minister has the authority to specify the terms and circumstances that allow them to remain or stop being a Qualifying Free Zone Person as of a different date.
- A Qualifying Free Zone Person’s taxable income is subject to 9% for the remaining portion of the tax incentive period specified in the applicable legislation of the Free Zone in which the Qualifying Free Zone Person is registered. This period may be extended based on the Minister’s suggestion and any conditions determined in a Cabinet decision, but no one period may exceed fifty years.
The following commercial activities are regarded as qualifying activities, according to Ministerial Decision No. 139 of 2023, and engaging in them makes a person a qualifying free zone person: qualifying activity
1. Fund management services that are governed by state regulations overseen by the appropriate body.
2. Offering financing and accounting services to affiliated parties.
3. Production of resources or things.
4. Ship ownership, control, and operation.
5. Keeping stocks and other financial instruments.
6. Services for logistics.
7. Leasing and financing of aircraft, including rotable parts and engines.
8. Reinsurance services that fall under the regulatory purview of the State’s appropriate authorities.
9. Material or product processing.
10. Provides Related Parties with Headquarter services.
11. The State’s appropriate regulatory body has regulatory jurisdiction over wealth and investment management services.
12. Any operations that support connected parties’ manufacturing, treasury, and finance services
13. The transfer of goods or materials into or out of a Designated Zone to a client who plans to resell the items or parts of them, or who plans to process or modify the items or parts of them in order to sell or resell them.
The distribution of products or materials must take place in or out of a designated zone, just like in qualifying activity 13, and any materials or commodities entering the state must be imported through the designated zone.
IBR Group offers comprehensive business consulting services, legal, compliance, and tax advising support, to help corporations in the United Arab Emirates and its Free Zones apply corporate tax. We are knowledgeable in every facet of corporate taxation.
With the help of the FTA Registered Corporate Tax Consultants in the UAE, we provide comprehensive corporate tax solutions for companies operating there. Our services include
Disclaimer: Above all information is for general reference only and sourced from internet, before making any kind of decision please visit the authorized websites of authorities and service providers.