When it comes to corporate tax in the UAE, the implications for Free Zone Persons differ from those for juridical persons or individuals. This article will provide you with comprehensive insights into Free Zone Persons, how they distinguish themselves from other categories of taxpayers, and the advantages they can gain from the corporate tax system.
**Who Qualifies as a Free Zone Person?**
Anyone conducting business within a Free Zone is automatically classified as a Free Zone person. However, to be officially recognized as a qualified Free Zone Person, specific conditions must be met. Failing to meet any one of these conditions will disqualify an entity from this category:
1. Maintaining sufficient substance in the UAE by conducting business activities within the country, rather than merely registering for tax-related purposes.
2. Earning “Qualifying Income” as defined by the Cabinet Decision.
3. Compliance with transfer pricing rules and the maintenance of related documentation.
4. Not electing to pay the full corporate tax.
Please note that the Ministry may introduce additional conditions in the future, so it is advisable to check the Ministry of Finance website for any updates.
**Understanding Qualifying Income**
Under the UAE Corporate Tax (CT) regime, a 0% tax rate applies to qualifying income, while a 9% rate applies to taxable income that does not meet the definition of qualifying income for Qualifying Free Zone Persons. The specific definition of qualifying income is yet to be determined by law, pending a decree from the Cabinet Decision of the CT regime.
**Benefits of Free Zones**
The UAE offers more than 40 free zones, each with its unique advantages. Free zones grant business owners complete ownership of their companies and keep asset-related information confidential. Businesses in free zones can engage in trade without facing trade barriers, even with other free zone companies. Import duties and corporate taxes do not apply, allowing for customs duty-free imports.
Moreover, free zone companies enjoy repatriation benefits, allowing them to transfer assets to foreign countries seamlessly. They also benefit from developed business communities and expedited business setup procedures.
**Taxation of Free Zone Persons under UAE Corporate Tax**
Qualifying Free Zone Persons will be subject to a 0% UAE corporate tax rate on their qualifying income and a 9% rate on their taxable income that falls outside the qualifying income definition. This means they will be subject to UAE corporate tax, with a 0% rate on qualifying income and a 9% rate on taxable income exceeding the qualifying income threshold.
**Can Free Zone Persons Enjoy a 0% Corporate Tax Rate?**
Yes, Free Zone Persons can benefit from a 0% corporate tax rate, provided they have not elected to pay the standard UAE corporate tax rate of 9%. This status is automatically conferred upon meeting the eligibility criteria for Qualifying Free Zone Persons. However, note that they will be subject to the 9% corporate tax rate on non-qualifying income.
**Tax Compliance for Free Zone Companies**
Free Zone entities, whether they qualify as Free Zone Persons or not, are required to register and file corporate tax returns with the Federal Tax Authority (FTA). This obligation applies even if a company operates within a Free Zone.
**Corporate Tax in Financial Free Zones**
Financial Free Zones are subject to the same rules and regulations regarding UAE corporate tax. They can opt for the 0% or 9% corporate tax rate by making a specific election, provided they meet the necessary conditions to become Qualifying Free Zone Persons.
**Taxation with a Mainland Branch**
If a Free Zone Person has a branch in the mainland, they will be subject to the standard corporate tax rate of 9% for income generated in the mainland. However, if they qualify as a Free Zone Person, they can enjoy the 0% corporate tax rate for income originating in the Free Zone, provided they maintain separate accounting records for the Free Zone and mainland.
**Taxation for Free Zone Persons Trading with the Mainland**
Even without a mainland branch, Free Zone Persons can engage in transactions with companies operating in the mainland UAE. In such cases, a 0% UAE corporate tax rate applies to income categorized as passive income, which includes capital gains, royalties, and dividends.
**Taxation of Transactions with Group Companies**
The tax treatment of transactions with group companies depends on the nature of the transaction. When mainland UAE companies engage in transactions with Free Zone Persons, these transactions are not deductible expenses. This ensures that the 0% UAE corporate tax rate remains consistent in these situations.
**Possible Disqualification from a 0% Tax Rate**
Free Zone Persons can be disqualified from the 0% corporate tax rate if the conditions for qualifying are no longer met. Earning income outside the mainland, for instance, disqualifies an entity from the 0% corporate tax regime, obligating them to pay the standard 9% corporate tax. Additional disqualification criteria may be introduced in the future.
**Electing the Standard Tax Rate**
A Free Zone Person can choose to elect the standard UAE corporate tax rate of 9% instead of the 0% rate. This election may have specific rules, and it is advisable to consider it carefully, as it might be irreversible. Keep an eye on the Ministry of Finance website for updates on any new conditions or changes.
When a Free Zone Person benefits from the 0% corporate tax regime on mainland UAE income, withholding tax may apply at a 0% corporate tax rate. This guarantees that taxes are gathered right from the point of origin.
**Audited Financial Statements**
To qualify for the 0% UAE corporate tax rate on their qualifying income, Free Zone Persons must submit audited financial statements along with their corporate tax returns. Auditing ensures the accuracy and integrity of accounting statements, preventing errors and fraud.
**Global Minimum Tax Rules**
As of now, the current UAE corporate tax regime does not include Pillar Two rules. The corporate tax rate for Qualifying Free Zone entities that are part of large multinational groups may differ when Pillar Two rules are introduced. For more information, refer to the Ministry of Finance FAQs section.
You can also Register Corporate Tax Registration in our website: