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Introduction
The free zone corporate UAE is a designated geographic area within a country that is set up to attract foreign investment and promote economic growth. Free zones typically offer a range of incentives to businesses, including tax breaks, streamlined regulations, and access to infrastructure and services. One of the key benefits of operating in a free zone is the potential for reduced corporate tax rates.
The combination of low corporate tax rates, streamlined regulations, and access to infrastructure and services make free zones an attractive option for businesses looking to expand their operations in the Middle East.
Key Takeaways
- The UAE has a free zone corporate tax regime that allows businesses to benefit from a preferential 0% corporate tax rate.
- To qualify, businesses must meet certain conditions, such as having a physical presence in the UAE and generating qualifying income.
- The free zone corporate tax regime is complex and there are a number of other factors that businesses must consider.
What is the Free Zone Corporate Tax Regime?
Free Zone Corporate Tax regime is a special tax framework that enables companies and branches operating in a designated free zones, known as free trade or economic zones to benefit from a preferential of zero (0%) Corporate Tax, excluded from qualifying transactions and activities. Qualifying transactions and activities include manufacturing, trading, services, and holding companies
The Free Zone Corporate Tax regime is a valuable tax incentive for business that are considering setting up operations in the United Arab Emirates (UAE). By qualifying for the regime, businesses can save a significant amount of money on taxes.
What is a Free Zone Person?
A Free Zone Person is a business entity that is incorporated or registered in a free zone in the United Arab Emirates (UAE). Free zones are special economic zones that offer a variety of benefits to businesses, including tax breaks, lower operating costs, and simplified regulations. A persons are typically subjected to the rules, respective regulations, and business conditions.
Who is Qualified as a Free Zone Person?
A Qualified Free Zone Person, known as QFZP is a business entity that meets certain conditions set by the United Arab Emirates (UAE) government. These conditions are designed to ensure that QFZPs have a genuine economic presence in the UAE and that they are not simply using the free zone regime to avoid paying taxes.
Qualifying Free Zone Persons (QFZPs) are eligible for a 0% corporate tax rate if they meet the following conditions:
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Maintain a physical presence in the UAE. This means having a registered office, employees, and other resources in the country.
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Generate qualifying income. This is income from activities that are conducted within the free zone and that are not related to the mainland. The specific activities that qualify for the 0% tax rate will be specified in a cabinet decision.
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Not have elected to be subject to the standard 9% CT rate. This means that the company must have not chosen to be taxed at the standard rate.
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Comply with transfer pricing provisions. These provisions ensure that the company’s transactions with related parties are conducted at arm’s length.
A Qualifying Free Zone Person (QFZP) that fails to meet any of the conditions will lose its qualifying status and will be ineligible to benefit from the Free Zone Corporate Tax regime for a period of five tax periods.
What is Qualifying Income
Qualifying income is income that is earned by a qualified free zone person (QFZP) and is subject to a preferential tax rate of 0%. The definition of qualifying income is set out in the UAE Corporate Tax Law and includes income from the following activities:
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Manufacturing or processing of goods: This includes income from the production, assembly, or processing of goods.
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Trading: This includes income from the purchase and sale of goods.
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Services: This includes income from the provision of services, such as consultancy, engineering, or IT services.
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Holding companies: This includes income from holding shares or other securities in other companies.
What is Non-Qualifying Income
Non-qualifying income is income that is not earned by a QFZP or is not subject to the preferential tax rate of 0%. Non-qualifying income is subject to the standard corporate tax rate of 9%. This means that businesses that earn non-qualifying income will be subject to a higher tax rate than businesses that earn qualifying income.
What are the Qualifying activities
The qualifying activities in free zone are the activities that are eligible for the benefits and incentives provided by the free zone authority. These activities are typically determined by the regulations and policies set by the free zone authority or governing body.
The purpose of specifying qualifying activities is to ensure compliance with local laws, regulations, and international standards, as well as to maintain the integrity and reputation of the free zone.
In the UAE, the qualifying activities for free zones are set out in the Ministerial Decision No. 139 of 2023. The following are some of the qualifying activities:
(a) Manufacturing of goods or materials
(b) Processing of goods or materials
(c) Holding of shares and other securities
(d) Ownership, management, and operation of ships
(e) Reinsurance services that are subject to regulatory oversight of the competent authority in the UAE
(f) Fund management services that are subject to regulatory oversight of the competent authority in the UAE
(g) Wealth and investment management services that are subject to regulatory oversight of the competent authority in the UAE
(h) Headquarter services to related parties
(i) Treasury and financing services to related parties
(j) Financing and leasing of aircraft, including engines and rotable components
(k) 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
(l) Logistics services
(m) Any activities that are ancillary to the activities listed above
It is important to note that the list of qualifying activities is not exhaustive, and there may be other activities that are eligible for the benefits and incentives provided by the free zone authority.
What are the Excluded activities
Excluded activities in free zones are the activities that are prohibited or restricted within the designated zone. These activities are typically determined by the regulations and policies set by the free zone authority or governing body.
The purpose of specifying excluded activities is to ensure compliance with local laws, regulations, and international standards, as well as to maintain the integrity and reputation of the free zone.
In the United Arab Emirates (UAE), the excluded activities for free zones are set out in the Ministerial Decision No. 139 of 2023. The following are some of the excluded activities:
1. Transaction with natural persons, except in relation to:
Ownership, fund-wealth management, and operation of aircraft
2. Regulated banking, insurance, finance, and leasing activities
3. Ownership or exploitation of immovable property, other than commercial property;
4. Ownership or exploitation of intellectual property assets
Business that engage in excluded activities in free zones may be subject to penalties, such as fines or the revocation of their license.
De Minimis Threshold
The de minimis threshold in free zone is a limit on the amount of non-qualifying income that a Qualifying Free Zone Person (QFZP) can earn before they lose their preferential tax status. The de minimis threshold is designed to ensure that QFZPs are not penalized for engaging in a small amount of non-qualifying activities.
If a QFZP’s non-qualifying income exceeds the de minimis threshold, then they will need to pay corporate tax on the entire amount of non-qualifying income. However, the business may be able to claim a deduction for certain expenses that are directly related to the non-qualifying income.
It is important to note that the de minimis threshold is not a hard and fast rule. The UAE tax authorities may still decide to tax a QFZP’s non-qualifying income if they believe that the QFZP is abusing the system.
Conclusion
In conclusion, free zone corporate tax provides businesses with a range of benefits and incentives that can significantly impact their bottom line. Free zones are designed to attract foreign investment and promote economic growth, and one of the key ways they achieve this is through favorable corporate tax treatment.
Additionally, free zones may offer other tax incentives, such as exemptions from import duties or value-added tax (VAT), further enhancing the financial advantages for companies. However, it is important to note that the regime is complex and there are a number of conditions that businesses must meet in order to qualify. Businesses that are considering setting up operations in the UAE should seek professional advice to ensure that they are compliant with the latest regulations.
Overall, the free zone corporate UAE can be an attractive option for businesses looking to expand internationally. Taking advantage of the tax breaks and other incentives offered by free zones, companies can reduce their tax burden and potentially increase their profitability. It is important to carefully research and evaluate the specific free zone and its tax policies before making any decisions.
References
United Arab Emirates: Ministry of Finance announces ‘Qualifying Income’ definition
UAE Corporate Tax in a Free Zone – Does it Meet Business Expectations?
UAE Corporate Tax | All You Need To Know About The Tax Implications On Free Zones