Registering for Corporate Tax and obtaining a unique Registration Number is a mandatory requirement for all taxable entities, including Free Zone businesses in the UAE. Register for corporate tax and maintain compliance through Filings.ae.
Registering for Corporate Tax and obtaining a unique Registration Number is a mandatory requirement for all taxable entities, including Free Zone businesses in the UAE. Register for corporate tax and maintain compliance through Filings.ae.
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Yes, corporate tax applies to Freezone companies in the UAE, but with specific conditions and benefits that differ from mainland companies. Under the new Federal Decree-Law No. 47/2022 on the Taxation of Corporations and Businesses, Free Zone entities, known as Free Zone Persons, can be categorised into Qualifying Free Zone Persons (QFZPs) and Non-Qualifying Free Zone Persons (NQFZPs).QFZPs may be eligible for a 0% tax rate on qualifying income if they meet certain conditions, such as having adequate substance in the UAE and deriving "Qualifying Income" as specified in the legislation. In this article, we will look into the Applicability of Corporate Tax on Freezone Company in Detail.
Filings.ae assists with UAE Corporate Tax Registration and return filing.
Get Started!Corporate Tax (CT) in the UAE is a form of direct tax imposed on the net income or profit of corporations and other business entities. It was introduced to strengthen the UAE's position as a global hub for business and investment, aligning its tax system with international standards and enhancing tax transparency. The Federal Decree-Law No. 47 of 2022, along with amendments made by Federal Decree-Law No. 60 of 2023, governs the CT, making it applicable to all businesses and commercial activities in the UAE, including those in Free Zones.
To grasp how Corporate Tax affects Free Zone entities in the UAE, it's crucial to differentiate between the two main categories of persons under UAE tax legislation: Natural Persons and Juridical Persons.
This group consists of individuals conducting business in their personal capacity, such as freelancers, sole proprietors, and civil companies. It's important to note that these individuals, even when operating within a Free Zone, are not classified as Free Zone Persons according to UAE tax regulations.
This category includes incorporated entities like Limited Liability Companies (LLCs). A key distinction is that these entities can qualify as Free Zone Persons if established within a Free Zone.
In the context of UAE Corporate Tax, entities within Free Zones are distinguished into two distinct categories, each with its own set of tax implications:
This classification is assigned to Free Zone entities that fulfill certain criteria outlined in the tax legislation. QFZPs are eligible for specific tax advantages, such as a 0% tax rate on qualifying income, following the stipulated legal provisions.
Conversely, an NQFZP refers to a Free Zone entity that falls short of meeting the requisite conditions to be deemed a QFZP. Consequently, NQFZPs may not be privy to the same tax benefits or exemptions available to QFZPs.
For Qualifying Free Zone Persons, the Corporate Tax will be applied as follows:
A Qualifying Free Zone Person (QFZP) is identified by fulfilling ALL the criteria listed below:
Fulfilling Additional Requirements in Cabinet Decision No. 139 of 2023 includes ensuring non-qualifying revenue falls below a certain threshold and maintaining audited financial statements.
The UAE's tax framework, particularly under Cabinet Decision 139 of 2023, categorises Free Zone business activities into three main types, each with its tax implications:
The UAE's Cabinet Decision 139 of 2023 specifies a range of business activities that qualify for certain tax benefits within Free Zones. Entities engaged in these activities, subject to meeting specific criteria, can access various tax exemptions or reduced rates. The qualifying activities include
These activities are recognized for their potential to contribute significantly to the UAE's economic diversification and are thus incentivised under the tax framework for Free Zones. Businesses in these areas must thoroughly understand the specific conditions and regulations to benefit from the available tax advantages fully.
Under the UAE's tax framework, certain business activities are designated as Excluded Activities, meaning entities engaging in these activities may not qualify for the tax benefits or exemptions typically available to Free Zone businesses. These Excluded Activities include:
Entities within Free Zones should carefully assess their business activities against this list to determine their eligibility for tax advantages under the UAE's Corporate Tax regime.
Qualifying Income plays a pivotal role in the UAE Free Zone tax framework, shaped by the specifics of business dealings and the entities involved.
Interactions Within Free Zones:
Engagements with Entities Outside Free Zones:
Other Sources of Income:
Exclusions:
Earnings from Domestic or Foreign Permanent Establishments (like branches in the Mainland or abroad), revenue from transactions involving immovable commercial property with entities outside the Free Zones, and income from non-commercial property transactions, irrespective of the counterparties are excluded from Qualifying Income.
In the UAE, the tax treatment of income from immovable property situated within Free Zones varies depending on the property type and the nature of the transactions involved:
Commercial property, used solely for business activities and not as residential accommodation, is subject to different tax rates based on the counterparty:
This encompasses immovable property not utilised for business operations. The tax rate applied is uniform at 9%, irrespective of whether transactions are with Free Zone or Non-Free Zone entities.
The new corporate tax regime in the UAE has implications for various freezone business transactions. Here's a breakdown of how different scenarios are treated:
Export of Goods and Services: Transactions between a free zone company and a business outside the UAE are completely tax-exempt. This means free zone businesses pay no corporate tax on profits earned from international trade.
Intra-Free Zone Trade: Profits generated from trade with other companies within the same free zone also benefit from a 0% tax rate. This fosters a thriving internal market within the free zone.
Passive Income from Mainland (Limited Cases): Even without a mainland presence, a free zone person can receive certain types of passive income from the UAE mainland without incurring corporate tax. This includes interest, royalties, dividends, and capital gains from holding shares in mainland companies (subject to specific conditions).
Mainland Branch Income: If a free zone person has a branch operating on the UAE mainland, the branch's income derived from mainland sources will be subject to the standard 9% corporate tax rate. However, the branch's income from non-mainland sources remains tax-exempt.
Payments from Mainland Group Companies: While income received by a free zone person from group companies based on the mainland is not taxed in the free zone, the corresponding expense for the mainland group company may not be tax-deductible. This means the mainland company might still face a 9% tax burden on the payment.
Sales to Mainland Importer: If a free zone person sells products to a UAE mainland company and the mainland company acts as the record importer (responsible for customs duties), the free zone person enjoys a 0% tax rate. However, any deviation from this structure could lead to a 9% tax implication.
Non-Qualifying Mainland Income: Any other type of income a free zone person generates from the UAE mainland that doesn't fall under the tax-exempt categories (points 1-3) will be subject to the standard 9% corporate tax rate.
In conclusion, while Corporate Tax applies to Freezone companies in the UAE, the specific conditions and benefits they enjoy differ significantly from mainland companies. If a Free Zone company meets certain conditions, like doing the right kind of business and having a real presence in the UAE, it could pay 0% tax on some of its earnings. This new tax system aims to make the UAE attractive for businesses while keeping up with global tax standards.
Filings.ae offers assistance in obtaining Corporate Tax Registration and preparing and submitting Corporate Tax returns.
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