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New free zone corporate tax regime in the UAE

By Lana Llinykh 14 Dec 2023

By Lana Llinykh 14 Dec 2023

Understanding the New Free Zone Corporate Tax Regime in the UAE

Understanding the New Free Zone Corporate Tax Regime in the UAE

In a move that marks a significant shift in the tax landscape, the United Arab Emirates (UAE) has introduced a new corporate tax regime specifically tailored for Free Zone entities. This development heralds a new era for businesses operating in these zones, offering them a potential 0% Corporate Tax rate under certain conditions. This article aims to provide a detailed examination of this new regime, elucidating the criteria for qualification and the implications for businesses operating within UAE Free Zones.

In a move that marks a significant shift in the tax landscape, the United Arab Emirates (UAE) has introduced a new corporate tax regime specifically tailored for Free Zone entities. This development heralds a new era for businesses operating in these zones, offering them a potential 0% Corporate Tax rate under certain conditions. This article aims to provide a detailed examination of this new regime, elucidating the criteria for qualification and the implications for businesses operating within UAE Free Zones.

Qualifying as a Free Zone Person

Qualifying as a Free Zone Person

The new regime categorizes certain Free Zone entities as ‘Qualifying Free Zone Persons,’ making them eligible for the coveted 0% Corporate Tax rate on their ‘Qualifying Income.’ This advantageous rate is applicable until the expiry of the incentive period outlined in the Free Zone’s specific legislation, subject to potential renewal.

The new regime categorizes certain Free Zone entities as ‘Qualifying Free Zone Persons,’ making them eligible for the coveted 0% Corporate Tax rate on their ‘Qualifying Income.’ This advantageous rate is applicable until the expiry of the incentive period outlined in the Free Zone’s specific legislation, subject to potential renewal.

Criteria for Qualification

Criteria for Qualification

To be designated as a Qualifying Free Zone Person, an entity must:

Earn Qualifying Income: This involves income from transactions within the Free Zone or with Non-Free Zone Persons, provided these transactions are part of ‘Qualifying Activities’ and not categorized as ‘Excluded Activities.’
Maintain Adequate Substance in the UAE: The entity is required to demonstrate a significant economic presence and active operational activities within the Free Zone.
Meet the De Minimis Requirement:A limited portion of non-qualifying income ipermissible, provided it stays within certain thresholds.
Opt-out of General Corporate Tax: The entity should elect not to be taxed under the general corporate tax regime.
Adhere to Transfer Pricing Rules: Compliance with transfer pricing norms and documentation stipulations is crucial.
Maintain Audited Financial Statements: Necessary for Corporate Tax Law purposes.Further conditions may be set by the Minister for an entity to be recognized as a QualifyingFree Zone Person.

To be designated as a Qualifying Free Zone Person, an entity must:

Earn Qualifying Income: This involves income from transactions within the Free Zone or with Non-Free Zone Persons, provided these transactions are part of ‘Qualifying Activities’ and not categorized as ‘Excluded Activities.’
Maintain Adequate Substance in the UAE: The entity is required to demonstrate a significant economic presence and active operational activities within the Free Zone.
Meet the De Minimis Requirement:A limited portion of non-qualifying income ipermissible, provided it stays within certain thresholds.
Opt-out of General Corporate Tax: The entity should elect not to be taxed under the general corporate tax regime.
Adhere to Transfer Pricing Rules: Compliance with transfer pricing norms and documentation stipulations is crucial.
Maintain Audited Financial Statements: Necessary for Corporate Tax Law purposes.Further conditions may be set by the Minister for an entity to be recognized as a QualifyingFree Zone Person.

Qualifying Income and Excluded Activities

Qualifying Income and Excluded Activities

0% Corporate Tax Rate: Qualifying activities eligible for the 0% rate, as detailed in the
Ministerial Decision No. 265/2023, range from manufacturing and processing goods to specific
financial and logistics services.
Exclusions: Conversely, Free Zone companies engaged in ‘Excluded Activities,’ as defined in
the same decision, are subject to the standard 9% Corporate Tax. These exclusions include
transactions with natural persons in most cases, banking, certain insurance, and finance
activities, and dealings involving immovable property outside the specific provisions.

0% Corporate Tax Rate: Qualifying activities eligible for the 0% rate, as detailed in the
Ministerial Decision No. 265/2023, range from manufacturing and processing goods to specific
financial and logistics services.
Exclusions: Conversely, Free Zone companies engaged in ‘Excluded Activities,’ as defined in
the same decision, are subject to the standard 9% Corporate Tax. These exclusions include
transactions with natural persons in most cases, banking, certain insurance, and finance
activities, and dealings involving immovable property outside the specific provisions.

Adequate Substance Requirements

Adequate Substance Requirements

To meet this requirement, Free Zone entities must conduct or outsource their primary income generating activities within the Free Zone. The assessment of ‘adequate substance’ is bespoke, considering the nature of the business, employee qualifications, operational expenses, and physical assets.

To meet this requirement, Free Zone entities must conduct or outsource their primary income generating activities within the Free Zone. The assessment of ‘adequate substance’ is bespoke, considering the nature of the business, employee qualifications, operational expenses, and physical assets.

De Minimis Requirements

De Minimis Requirements

This provision allows for a marginal amount of non-qualifying income, capped at the lower of  AED 5,000,000 or 5% of total revenue, without affecting the entity’s eligibility for the 0% tax rate.

This provision allows for a marginal amount of non-qualifying income, capped at the lower of  AED 5,000,000 or 5% of total revenue, without affecting the entity’s eligibility for the 0% tax rate.

Electing for General Corporate Tax Rates

Electing for General Corporate Tax Rates

Entities can choose to be taxed under the general corporate tax rates, a decision that influences their status as a Qualifying Free Zone Person and binds them for a specified period.

Entities can choose to be taxed under the general corporate tax rates, a decision that influences their status as a Qualifying Free Zone Person and binds them for a specified period.

Implications and Examples

Implications and Examples

Entities earning income from certain non-qualifying activities, such as leasing properties outside Free Zones or specific transactions with individuals, are generally ineligible for the 0% rate. In contrast, those engaged in approved activities within the Free Zone can leverage this regime’s benefits

Entities earning income from certain non-qualifying activities, such as leasing properties outside Free Zones or specific transactions with individuals, are generally ineligible for the 0% rate. In contrast, those engaged in approved activities within the Free Zone can leverage this regime’s benefits

Conclusion

Conclusion

The UAE’s new Free Zone Corporate Tax regime offers attractive tax incentives but imposes rigorous compliance requirements. Businesses in these zones must judiciously evaluate their operations and financial practices to ensure they meet the criteria for the 0% Corporate Tax rate. This regime signifies the UAE’s continued commitment to fostering a conducive business environment while aligning with global tax practices.

The UAE’s new Free Zone Corporate Tax regime offers attractive tax incentives but imposes rigorous compliance requirements. Businesses in these zones must judiciously evaluate their operations and financial practices to ensure they meet the criteria for the 0% Corporate Tax rate. This regime signifies the UAE’s continued commitment to fostering a conducive business environment while aligning with global tax practices.


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