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Freezone
DCC
Freezone 
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Freezone 
DUQE
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Designated Free Zone Entity - UAE Corporate Tax Law
The United Arab Emirates (UAE) has long been known as a hub for international business, with numerous free zones designed to attract foreign investment and foster economic growth. Recently, the UAE introduced a federal corporate tax, changing the landscape for many companies. As businesses adapt to this new environment, it’s important to understand what a “Designated Free Zone Entity” is and how it fits into the country’s tax framework. Let’s break it down in simple terms.
What Is a Designated Free Zone Entity?
A Designated Free Zone Entity is essentially a company set up in a UAE free zone that meets specific criteria set out under the new corporate tax rules. When a free zone is officially recognized (or “designated”) by the UAE authorities for certain tax benefits, qualifying companies registered there can enjoy a special tax treatment—often a 0% corporate tax rate on certain types of income.
Key Conditions to Qualify for 0% Corporate Tax
For a Designated Free Zone Entity to maintain the 0% corporate tax incentive, the business must typically:
- Stay Within the Rules of the Free Zone: The entity must comply with all regulations of the free zone authority under which it is registered.
- Limit Activities with Mainland UAE: Generally, these entities should not conduct significant business with the UAE mainland. If they do, the income earned from such mainland transactions may be taxed at the standard corporate tax rate (which is currently 9%). For example, selling goods and services directly to mainland customers may mean losing the 0% benefit on that portion of income.
- Meet Substance Requirements: The entity must show that it has a real presence in the UAE—this could include having office space, employees, or other tangible signs that it is actually operating and not just set up to avoid taxes.
- Earn Qualifying Income: Not all income automatically qualifies for the 0% rate. The UAE authorities have defined “Qualifying Income” as something that falls under the low-tax category. This usually includes income from activities that occur within the free zone or certain types of passive income (like interest from deposits) as long as the conditions are met.
Also read: Corporate Tax Rate in UAE
What If the Conditions Are Not Met?
If a free zone entity fails to follow the rules—say, it begins trading extensively with the UAE mainland without the proper structure or doesn’t maintain adequate substance—it could lose its “designated” status for tax purposes. This would mean its profits would be taxed at the normal corporate tax rate, just like businesses outside the free zone.
Staying Compliant
To benefit from being a Designated Free Zone Entity, companies should have a qualified Tax Advisor who can help keep proper accounting records to clearly separate qualifying income (0% tax) from non-qualifying income (9% tax). Seek professional advice to stay updated on changes to tax laws and regulations as the UAE’s tax environment continues to evolve.
Contact filings.ae today to get professional advice from qualified tax advisors and safeguard your business’s tax status! Get Started!
FAQ on Designated Free Zone Entity
What is a Designated Free Zone Entity under UAE Corporate Tax law?
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A Designated Free Zone Entity is a company established in a specific UAE free zone that has been officially recognized for tax incentives under the new corporate tax framework. These entities can benefit from a 0% corporate tax rate on qualifying income, provided they meet certain criteria set by the authorities.
How do I know if my company qualifies as a Designated Free Zone Entity?
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Your company must be registered in a recognized designated free zone, comply with the free zone’s regulations, maintain sufficient economic substance, and limit taxable transactions with the UAE mainland. Meeting these requirements can help ensure that your business enjoys the 0% tax benefit on qualifying income.
What activities could disqualify my company from the 0% tax benefit?
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Excessive business dealings with the UAE mainland, failing to meet economic substance requirements, or not adhering to the free zone’s rules and regulations can cause you to lose your 0% tax benefits. In such cases, non-qualifying income may be taxed at the normal corporate tax rate.
Does all income earned by a Designated Free Zone Entity qualify for the 0% tax rate?
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No. Only “qualifying income” as defined by the UAE authorities is eligible for the 0% rate. Other types of income, especially those related to mainland business activities, may be subject to the standard corporate tax rate of 9%.
How can I ensure that my company maintains the 0% corporate tax benefit?
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You should keep clear records, properly segregate qualifying and non-qualifying income, remain compliant with your free zone’s regulations, and meet economic substance requirements. Regularly consulting with tax advisors can help you stay aligned with current laws.
What if the rules for Designated Free Zones change in the future?
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The UAE’s tax landscape is evolving. If new guidelines or criteria are introduced, you’ll need to adapt your business operations accordingly. Staying informed and seeking professional advice is crucial to maintaining compliance and preserving tax benefits.
Are there any penalties for non-compliance with designated free zone requirements?
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Yes. Non-compliance may result in losing your favourable tax status and potentially facing penalties under the UAE tax law. This includes having your income taxed at the standard rate rather than the 0% rate for qualifying activities.
How can I keep up-to-date with changes in UAE Corporate Tax laws related to free zones?
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Regularly checking official government announcements, consulting with professional tax advisors, and partnering with compliance-focused service providers like Filings.AE can help you stay informed and prepared for any regulatory updates.
How do I file a corporate tax return for a Designated Free Zone Entity?
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Your corporate tax return needs to reflect accurate financial records, segregated income streams, and proof of compliance with the free zone and economic substance rules. It’s essential to follow the UAE Federal Tax Authority’s filing guidelines and deadlines.
How can Filings.AE help my business file Corporate Tax returns and maintain compliance?
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Filings.AE is a professional service provider that specializes in UAE tax compliance. They can guide you through the entire corporate tax return process, ensure your financial records are in order, help identify qualifying and non-qualifying income, and provide ongoing advice to keep your business aligned with the latest tax regulations. With their expertise, you can minimize the risk of errors, save time, and focus on growing your business while staying tax-compliant.