Overview – Corporate Tax for UAE Free Zone Companies

Frequently Asked Questions

A Free Zone Person refers to a legal entity that is either incorporated or established within the guidelines and regulations of a Free Zone. Additionally, it includes branches of mainland UAE or foreign legal entities that are registered within a Free Zone. A foreign company that transfers their place of incorporation to a Free Zone in the UAE is considered a Free Zone Person.

The Free Zone Corporate Tax regime is exclusively applicable to Free Zone Persons. The term “Free Zone Person” is crucial in determining the income that qualifies for the tax regime, as it treats income earned from transactions with other Free Zone Persons as Qualifying Income.

The benefits of the Free Zone Corporate Tax regime expire at the end of the tax incentive period mentioned in the legislation of the relevant Free Zone. However, these benefits can be extended if a Cabinet Decision is issued following Article 18 of the Corporate Tax Law.

The benefits of the Free Zone Corporate Tax regime expire at the end of the tax incentive period mentioned in the legislation of the relevant Free Zone. However, these benefits can be extended if a Cabinet Decision is issued following Article 18 of the Corporate Tax Law.

The benefits of the Free Zone Corporate Tax regime expire at the end of the tax incentive period mentioned in the legislation of the relevant Free Zone. However, these benefits can be extended if a Cabinet Decision is issued following Article 18 of the Corporate Tax Law.

No, there is no requirement for an entity to be established in a Free Zone before its first Tax Period to benefit from the Free Zone Corporate Tax regime. Existing and newly established Free Zone companies and branches can avail themselves of the tax benefits offered by the administration.

No, the Free Zone Corporate Tax regime does not limit or restrict who can establish or own a Free Zone Person. Any eligible legal entity can establish or own a Free Zone Person.

No, the Free Zone Corporate Tax regime is only applicable to income derived from transactions with other Free Zone Persons and Qualifying Activities performed within the Free Zone’s prescribed areas.
Suppose a Qualifying Free Zone Person conducts activities outside the Free Zone that gives rise to a Permanent Establishment in the mainland UAE or a foreign country. In that case, the income attributable to that Permanent Establishment will be subject to Corporate Tax at 9%.

To benefit from the Free Zone Corporate Tax regime, a legal entity must be incorporated or registered in one of the eligible Free Zones for the 0% Corporate Tax rate. Additionally, the entity must meet the following criteria:

  • Keep an adequate substance in a free zone.
  • Derive Qualifying Income
  • Not chosen to be governed by the standard UAE Corporate Tax structure.
  • abide by the arm’s length principle, transfer pricing regulations, and paperwork obligations.
  • Prepare and maintain audited financial statements.

No, the Free Zone Corporate Tax regime does not mandate minimum investment, job creation, or business expansion requirements. However, a Qualifying Free Zone Person must possess adequate staff, assets, and incur reasonable operating expenses within a Free Zone in proportion to the Qualifying Income earned.

Yes, a Qualifying Free Zone Person that meets all the relevant conditions will automatically benefit from the Free Zone Corporate Tax regime—no need to make a separate election or apply to the Federal Tax Authority. However, a Qualifying Free Zone Person who prefers not to avail of the tax benefits can apply the standard UAE Corporate Tax regime instead.

Yes, Alongside maintaining audited financial statements and appropriate transfer pricing documentation, a Qualifying Free Zone Person must keep all relevant documents and records as evidence of its adherence to the conditions to qualify as a Free Zone Person. This encompasses documentation related to the substance maintained within a Free Zone, the activities conducted, and the income earned.

Failure to satisfy any of the conditions leads to disqualification from the Free Zone Corporate Tax regime for five (5) Tax Periods, commencing from the Tax Period in which any of the conditions are no longer met. Throughout this period, the Free Zone Person will be subjected to the standard UAE Corporate Tax regime on all their Taxable Income.

A Qualifying Free Zone Person is not eligible for the free zone corporate tax system if they earn non-qualifying income, unless such revenue is related to a domestic or foreign Permanent Establishment or is generated from immovable property situated in a free zone. To prevent disqualification owing to generating a minor or incidental amount of non-Qualifying Income, there are de minimis criteria in place.

Due to small or incidental amounts of non-qualifying income, a Qualifying Free Zone Person cannot lose the advantages of the Free Zone Corporate Tax regime due to the de minimis rules.

A Qualifying Free Zone Person is responsible for ensuring its compliance with all conditions for the Free Zone Corporate Tax regime and for filing its Corporate Tax return accordingly.

The Federal Tax Authority oversees the administration and enforcement of UAE Corporate Tax and has the authority to verify and ascertain if a Qualifying Free Zone Person has fulfilled all the requisites of the free zone corporate tax system.

Yes, A Qualifying Free Zone Person must prepare and maintain audited financial statements conducted by an independent audit firm.

Unless the other Free Zone Person is not the final beneficiary of the relevant transaction or supply, or the revenue comes from an Excluded Activity, all income from transactions with other Free Zone Persons is considered Qualifying income.

No matter if the income comes from an additional Free Zone Person who is qualified for the Free Zone Corporate Tax system, it will still be recognised as qualifying income even though it is not the result of an Excluded Activity.

A Free Zone Person is deemed the ultimate recipient of a transaction if that other Free Zone Person possesses the right to use and enjoy the supply by the Qualifying Free Zone Person, without being legally or contractually obligated to pass on the service or good supplied to another individual. Free Zone Persons acting as intermediaries, agents, or conduits on behalf of another person would not be regarded as the ultimate recipient of the relevant transaction with the Qualifying Free Zone Person.

No, the AED 375,000 zero tax band does not apply to the income of a Qualifying Free Zone Person subject to the 9% Corporate Tax rate.

The AED 375,000 zero tax band is available for Free Zone Persons who are not qualified under the Free Zone Corporate Tax regime.

Payments made to a Qualifying Free Zone Person are not subject to any restrictions or limits on their ability to be deducted. According to the general guidelines under the Corporate Tax Law, which control whether company expenses qualify for deduction, such payments will be considered deductible.

Subject to the application of a double tax treaty, legal entities incorporated or established under the rules and regulations of a Free Zone are considered Resident Persons for UAE Corporate Tax purposes and fall under Cabinet Decision No. 85 of 2022 on Determination of Tax Residency. A foreign company that continues to function as an entity incorporated or founded in a Free Zone while changing its place of incorporation to the UAE would also be considered a Resident Person according to the UAE Corporate Tax Regulations.

On the other hand, a branch is considered an extension of its parent or head office, and thus, a foreign legal entity registering a Free Zone branch would be classified as a Non-Resident Person.

Relief from taxation under a double tax treaty is available to individuals or entities that are “resident” in one or both countries involved in the treaty. Although residency is referred to differently in double tax treaties, it usually means that the business or person seeking treaty benefits must be tax-responsible, have a legal connection (such as incorporation), an economic connection (such as effective management or a substantial presence), or a combination of these (such as a presence in the country that is the subject of the treaty).

A Free Zone Person is considered a ‘Resident Person’ in the UAE for Corporate Tax purposes due to its incorporation in the UAE, like any other UAE company. Furthermore, a Qualifying Free Zone Person is also ‘liable to tax’ in the UAE, albeit at a 0% rate on its Qualifying Income.

The ability to benefit from double tax treaties is subject to other conditions and must be assessed on a case-by-case basis, considering all relevant facts and circumstances, as well as the specific conditions outlined in the applicable double tax treaty.

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