FAQs: freezone under UAE corporate law

Free zone under UAE corporate tax law Important Questions/Answers (FAQ)

1. Who is considered eligible as a Free Zone entity?

Every person engaged in business activities within a Free Zone is automatically categorized as a Free Zone entity. The satisfaction of the following conditions is required to be met

• The entity must possess and uphold a sufficient presence within the UAE. This implies that business activities are actively conducted within the UAE jurisdiction rather than mere registration for tax-related motives.
• The income of the entity must fall under "Qualifying Income".
• Compliance with transfer pricing regulations is mandatory, and the person must maintain the associated transfer pricing documentation.
• The person must not have chosen to pay the full corporate tax.
• The Minister has the authority to append additional conditions to this list, making it advisable to periodically check the Ministry of Finance website for potential updates."

2. What is the meaning of qualifying income?

In accordance with the CT (Corporate Tax) regime, a 0% CT rate is applicable to qualifying income, while a 9% CT rate is applicable to taxable income that does not meet the criteria for qualifying income among Qualifying Free Zone entities. 

3. What are the benefits of free zones?

The UAE boasts over 40 free zones, each offering a multitude of advantages. Free zones permit complete ownership of your enterprise, and these zones' administrative bodies ensure the confidentiality of asset-related information. Trading within free zone companies is unhindered by trade barriers, enabling smooth commerce even with other free zone entities. An exemption is granted to Free Zones from corporate taxes by facilitating duty-free imports. Free zone enterprises reap the benefits of full repatriation, allowing the seamless transfer of assets to foreign nations. These businesses thrive within well-established commercial communities and enjoy expedited business establishment procedures.

4. Is Registration and Corporate Tax Return Compulsory for Free Zone Companies?

Indeed, Free Zone entities are obligated to register by visiting the Federal Tax Authority (FTA) website and adhering to the stipulated guidelines. This requirement holds true even if an entity does not meet the criteria of a Free Zone person but conducts operations within a Free Zone. Similarly, such a company must submit the corporate tax return in line with the directives of the corporate tax regime, irrespective of their eligibility for qualifying income rates.

5. Is there uniformity of Corporate Tax for Financial Free Zone Entities?

No distinction exists in corporate tax rates for entities falling within a financial-free zone. Both entities are subject to the same set of rules and regulations governing UAE corporate tax. They can opt for the 0% or 9% corporate tax rate based on explicit selection. For businesses functioning within the Free Zone, adherence to conditions and attainment of Qualifying Free Zone entity status is a prerequisite to enjoying the 0% tax rate."

6. What Is The Tax Treatment for Free Zone Companies with Mainland Branches?

Should a Free Zone entity possess a branch on the mainland, and if the generated taxable income emanates from the mainland, the entity is liable to pay the standard corporate tax rate of 9%. Nevertheless, if the person qualifies as a Free Zone person and their taxable income is derived from the Free Zone region, a 0% corporate tax rate can be applied. This assumes the person maintains separate accounting records for both Free Zone and mainland activities. If such separation is absent, the entity is obligated to remit a 9% corporate tax on both Free Zone and mainland income.

7. What Is Taxation Treatment of Free Zone Entities Engaging in Mainland Trade sans Branches?

Even in the absence of a mainland branch, Free Zone persons can engage in transactions with companies operating in mainland UAE. Under this circumstance, the Free Zone entity is eligible for a 0% UAE corporate tax rate when the income generated from mainland UAE falls within the ambit of passive income. This category includes capital gains, royalties, dividends, and the like."

8. What Are The Tax Implications of Transactions with Group Companies?

The tax treatment of transactions with group companies hinges on the nature and mode of the transaction. For instance, payments from mainland group companies to Free Zone persons are non-deductible expenses. Transactions between mainland UAE companies and Free Zone persons are subject to the 0% UAE corporate tax rate, streamlining tax applications for seamless compliance.

9. Is it possible for a Free Zone Entity to Opt for the Standard 9% Tax Rate?

Certainly, an entity incorporated in the Free Zone retains the option to opt for the 9 percent Corporate Tax instead of getting advantages from the 0%. However, this choice might be subject to specific regulations, as certain experts propose that such an election could be irreversible. This implies that the decision can only be altered once, necessitating careful consideration regarding the extent of corporate tax the company is prepared to pay. In the event of any new conditions or modifications, the Ministry of Finance website may provide updated information."

10. Is Withholding Tax applicable to the Income of Free Zone entities?

Withholding tax, or the pay-as-you-go tax approach, involves the deduction of tax at the income source prior to subsequent deductions. The entity responsible for collecting the tax directly remits it to the government. When a Free Zone entity benefits from the 0% corporate tax regime on mainland UAE earnings, withholding tax can be applied at a 0% corporate tax rate."

11. Is Submission of Audited Financial Statements Mandatory for Free Zone Entities?

Certainly, a Free Zone entity must furnish audited financial statements alongside their corporate tax returns. This procedure is essential for the person to access the 0% UAE corporate tax rate on their qualifying income. Auditing entails a thorough examination and evaluation of a business's financial records. This scrutiny ensures the accuracy of accounting statements and safeguards against potential errors and fraudulent practices."