The UAE corporate tax implications for Free Zone Persons differ from those for juridical persons or individuals. Here’s everything you need to know about Free Zone Persons, how they differ from other taxpayer categories, and the ways they can benefit from the corporate tax regime.

Who qualifies as a Free Zone Person?
Anyone conducting business in a Free Zone is considered a Free Zone Person. However, to be classified as a qualified Free Zone Person, several conditions must be met. Failure to meet even one of these conditions disqualifies the entity. The entity must have and maintain sufficient substance in the UAE, meaning it actively carries out business activities in the country rather than being registered solely for tax purposes. It must earn “Qualifying Income” as defined by a Cabinet Decision, comply with transfer pricing regulations and maintain relevant documentation, and must not have opted to pay corporate tax in full. Additional conditions may be introduced by the Minister, so it is advisable to check the Ministry of Finance website for updates.

What does “qualifying income” mean?
Under the UAE corporate tax (CT) regime, qualifying income is subject to a 0% corporate tax rate, while non-qualifying taxable income is taxed at 9% for Qualifying Free Zone Persons. However, the specific definition of qualifying income has yet to be provided by law. A Cabinet Decision will clarify the criteria for qualifying income under the CT regime.

What are the advantages of Free Zones?
The UAE has over 40 free zones offering numerous benefits. Free zones allow for 100% foreign ownership, and confidentiality of assets is maintained by the Free Zone authorities. Companies in free zones are exempt from trade barriers, import duties, and corporate taxes, making trade and importing goods easier. These companies also enjoy full repatriation benefits, allowing for the transfer of assets abroad, and benefit from streamlined business setup processes within established business communities.

Will Free Zone Persons be taxed under the UAE corporate tax?
Yes, Qualifying Free Zone Persons will be taxed under the UAE corporate tax regime. They benefit from a 0% tax rate on qualifying income but will be taxed at a 9% rate on any income that does not meet the criteria for qualifying income.

Can a Free Zone Person enjoy the 0% corporate tax rate?
Yes, a Free Zone Person can benefit from the 0% corporate tax rate as long as they meet the requirements for being a Qualifying Free Zone Person and have not opted for the standard 9% rate. The 9% rate will only apply to any non-qualifying taxable income.

Is a Free Zone company required to register and file a corporate tax return?
Yes, Free Zone entities must register with the Federal Tax Authority (FTA) and file a corporate tax return, regardless of whether they qualify for the 0% tax rate or not.

Will the corporate tax differ for entities in financial free zones?
No, entities in financial free zones are subject to the same corporate tax rules as other free zone entities. They can benefit from the 0% or 9% tax rate, depending on their election and qualifying status.

What is the tax rate for a Free Zone Person with a mainland branch?
A Free Zone Person with a mainland branch will be subject to a 9% corporate tax rate on income generated from the mainland. However, if they are a Qualifying Free Zone Person, they can still benefit from the 0% tax rate on income generated from the Free Zone, provided they maintain separate accounts for mainland and Free Zone activities.

What is the tax rate for Free Zone Persons trading with the mainland without a branch?
Free Zone Persons can trade with mainland companies without a branch and still benefit from the 0% corporate tax rate, provided the income from the mainland is classified as passive income, such as capital gains, dividends, and royalties.

How are transactions with group companies taxed?
Transactions between Free Zone Persons and mainland group companies may follow specific rules. For instance, payments made by a mainland company to a Free Zone Person may not be deductible, but the Free Zone Person can maintain the 0% tax rate on these transactions, simplifying the tax process.

Can a Free Zone Person be disqualified from the 0% tax rate?
Yes, a Free Zone Person can be disqualified from the 0% tax rate if they fail to meet the qualifying conditions. Additionally, earning income from activities outside the qualifying Free Zone could result in paying the standard 9% corporate tax.

Can a Free Zone Person elect the regular 9% tax rate?
Yes, Free Zone Persons can choose to opt for the standard 9% corporate tax rate instead of the 0% rate. However, this decision may be irreversible, so it is important to consider the long-term impact.

Will withholding tax apply to a Free Zone Person’s income?
Withholding tax may apply at a 0% rate to a Free Zone Person’s income earned from the mainland, where relevant.

Should a Free Zone Person submit audited financial statements?
Yes, a Free Zone Person is required to submit audited financial statements along with their corporate tax return to qualify for the 0% tax rate on qualifying income.

Will Free Zone entities be subject to global minimum tax rules?
Currently, the UAE has not implemented the Pillar Two rules for a global minimum tax. However, once these rules are introduced, large multinational Free Zone entities could face a different corporate tax rate. Further updates are expected from the Ministry of Finance.