Corporate tax is charged on net profits at the rate of 0% on the first AED 375 000 and 9% for any amount that exceeds this sum for standard mainland companies. A free zone entity’s corporate tax rate is 0% for entities that are Qualifying Free Zone Persons (QFZP) in line with the UAE free zone corporate tax rules. However, nonqualifying income incurred a tax rate of 9 percent.
The UAE Federal Tax Authority (FTA) has released a corporate tax guide for the free zone regime. Under this regime, qualifying free zone persons benefit from a 0% corporate tax rate on qualifying income, while a 9% tax rate applies to other taxable income.
UAE Free Zone Tax Regulations
The following are the requirements that a Free Zone entity needs to meet to qualify for 0% corporate tax as a QFZP:
- Maintain adequate substance like physical offices and employees in the UAE.
- Generate income primarily from qualifying activities conducted within the free zone or with international clients.
- Have audited financial statements as per IFRS.
- Not elect normal corporate tax rates voluntarily.
- Non-qualifying income should be below 5% of total revenue or AED 5 million, whichever is lower.
- Comply with the rules of the designated free zone authority.
Qualifying and Non-Qualifying Activities
According to UAE free zone corporate tax rules, only income from probably listed in Ministerial Decision No (265) of 2023, are qualified to be exempted from being taxed through corporate tax. This includes manufacturing companies, trading firms, fund managers, treasuries and the like. Revenue such as insurance, banking, and other connected operations and real estate not within the free zones is considered as non-qualifying activity.
Implications of the De Minimis Rule
QFZP’s may have non-qualifying income below 5% of total revenue or AED 5 million, whichever is lower, conforming to de minimis rule. For instance, if the total sales of a company were AED 10 million while AED 400,000 was non-qualifying income which was 4% of the entire sales, the provision de minimis allows the company to enjoy the 0% tax rate.
What is Qualifying Income?
Qualifying income refers to the income that is eligible for 0% corporate tax relief for Free Zone entities in the UAE as per the current tax regulations. The nature of transaction and counterparties determine whether income will be deemed as qualifying or not.
| Transaction Type | Tax Treatment |
|---|---|
| Transaction with another Free Zone person | Income generated can be considered as qualifying income |
| Transaction with a non-Free Zone person | Income may not be considered as qualifying income |
| All other transactions | Income can be considered qualifying if it satisfies de minimis requirements |
However, the following types of income are not considered qualifying:
- Income generated from domestic (mainland) or foreign permanent establishments
- Income from immovable property outside the Free Zone
- Income from certain non-commercial properties
Corporate tax compliance in UAE free zones
QFZPs must comply with the documentation and reporting requirements below to avail tax benefits:
| Requirement | Details |
|---|---|
| Maintain Books of Account | As per IFRS audited annually by a recognized firm |
| File Annual Tax Return | Before the due date specified by the tax authority |
| Follow Transfer Pricing Rules | For transactions with related parties |
| Appoint Tax Representative | In case of non-residency |
Strict adherence to compliance is essential to retain QFZP status. Non-compliance can lead to tax investigations and penalties.
FAQs
Q1. Is dividend income taxable?
A1. Dividend income that QFZPs receive from other free zone companies is automatically qualifying income and, therefore, not taxable.
Q2. How is self-employment income treated?
A2. The independent income of sole proprietors or partnerships does not qualify for the QFZP status. These persons are subject to tax if they are individuals carrying out business within free zones.
Q3. What if non-qualifying income exceeds limits?
A3. Any amount over the de minimis rule which is 5% of the revenue or AED5 million will be charged at 9% for QFZPs.
Conclusion:
In conclusion, the application of the corporate tax system enables tax advantages for free zone companies in UAE while ensuring proper compliance with UAE free zone tax regulations. Thus, businesses are advised to seek the expert services of top Tax Consultants in UAE to effectively ensure corporate tax compliance, Therefore, contact us today and we shall be glad to assist you.
