Are Companies setup in a Free Zone Exempt from corporate TAX?
Starting from June 2023, Free Zone Businesses and qualifying free zone persons may be subject to either a 0% or 9% corporate tax rate, depending on their qualifying income. Meanwhile, mainland businesses are required to stick to a fixed 9% rate, applicable to their taxable income exceeding AED 375000.
A Free Zone Person is a legal entity that is incorporated or established under the rules and regulations of a Free Zone, or a branch of a mainland UAE or foreign legal entity that is registered in a Free Zone.
The main question is, will corporate tax affect free zone entities? According to the recent information issued by the Ministry of Finance, Yes Corporate tax will affect Free Zone entities.
However, as Free Zones play a critical role in driving economic growth and transformation in the UAE, the Free Zone Corporate Tax Regime was introduced. This regime enables Free Zone companies and branches that meet certain conditions to benefit from a preferential 0% Corporate Tax rate on income from qualifying activities and transactions.
To fully understand if you as a Free Zone entity fall within the requirements of the Free Zone Corporate Tax Regime. We need to define the terms: Qualifying Freezone Person, Qualifying Activities and Qualifying Income.
What is a Qualifying Freezone Person?
Under the UAE Corporate Tax Regime, Qualifying Free Zone persons can enjoy a special 0% tax rate on their Qualifying Income if they meet certain conditions:
- Maintaining adequate substance in the free zone
- Deriving Qualifying Income
- Not having elected to be subject to CT
- Complying with the Arm’s Length Principle and Transfer Pricing documentation
- Ensuring non-qualifying revenues do not exceed the de-minimis requirements (The de minimis requirements will be satisfied where non-qualifying revenue does not exceed 5% of total revenue or AED 5 million, whichever is lower)
- Preparing audited Financial Statements in accordance with the law
- Meeting any other conditions that may be prescribed by the Minister of finance.
Note: Ensuring compliance with all these conditions from the outset is extremely important. Failing to meet any of them could lead to losing the benefit not only for the current year but also for the following four years, even if all conditions are met later.
What are Qualifying Activities?
Qualifying activities include activities decided by the Minister and carried out by a Qualifying Free Zone Person, resulting in Qualifying Income.
According to the Recent announcement made by Ministry of Finance, qualifying activity includes:
- manufacturing of goods or materials.
- processing of goods or materials.
- holding of shares and other securities.
- operation of ships.
- reinsurance services.
- financing and leasing of aircraft, including engines and rotatable components.
- logistics services.
- distribution in or from a designated zone that meets the relevant conditions.
- any activities that are ancillary to the above-mentioned activities.
What is Qualifying Income?
Qualifying Income Includes income generated from transactions with other free zone persons. This implies that businesses operating in the Free Zone sector can enjoy tax benefits when conducting business with other free zone entities.
Qualifying income of the qualifying free zone entity includes following categories of income:
- Income from deals with a Free Zone Person, except for earnings from Excluded Activities.
- Income resulting from transactions with a Non-Free Zone Person, but solely for Qualifying Activities that aren’t Excluded Activities.
- Any additional income, provided that the Qualifying Free Zone Person meets the minimum requirements outlined in Article 4 of this Decision.
Note: if you have any questions after reading this, please reach out to us.