The recent changes in the laws regarding corporate tax particularly the Federal Decree No. 47 of 2022 of the UAE government have stirred a lot of debate in the business community.
This law states that every corporation including free zone entities will be liable for corporate tax registration. 9% corporate tax has been fixed for the taxable income of the businesses. This tax is also applicable to free zone businesses and the qualifying free zone persons based on the income they generate every year.
Here is all you need to know about the corporate tax impacts on the free zone companies in the UAE:
Corporate Tax for Freezone Companies
A free zone is a region within the state of the UAE as defined by the specific demographics. The companies located in the free zones of the UAE enjoy 100% customs-free, foreign ownership, and returns on capital. You can hire our expert tax consultants in Dubai to navigate corporate tax implications for Freezones.
However, the laws for corporate tax in the UAE can impact the amenities being provided to these free zone companies. The effects of the corporate tax laws on the free zone businesses cannot be ignored.
It is also to be noted that, free zone companies will still be able to enjoy several corporate tax benefits.
The Impact of Corporate Tax on Qualifying Free Zone Persons
For a freezone company to be included in the definition of a qualifying free zone person, the following conditions are to be met:
- They must maintain an adequate presence and substance in the state and derive qualifying income.
- Comply with the arm’s length principle and not elect to be subject to corporate tax under the Decree.
- The business must earn the qualifying income.
- The company should generate adequate income and have the necessary workforce and assets to support it.
If the conditions to be a qualified free zone person are not met, the Ministry of Finance may cease the status as a qualified free zone. After that 9% of corporate tax on the taxable income of the qualifying free zone entity, will be applied for the remaining tax incentive period.
Qualifying Activities for the Qualifying Freezone Companies
In summary, the ‘Qualifying Activities’ include
- Manufacturing of goods or materials
- Processing of goods or materials
- Holding of shares and other securities
- Ownership, management, and operation of ships
- Reinsurance services
- Fund management services subject to regulatory control by the appropriate authorities in the UAE
- Wealth and investment management services are subject to the regulatory oversight of the competent authority in the UAE.
- Headquarters services to related parties
- Treasury and financing services to related parties
- 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.
Income from certain ‘Excluded Activities’ will not be considered ‘Qualifying Income’, regardless of whether it is generated from a Free Zone Person or as part of a ‘Qualifying Activity’. This includes revenue generated from transactions with natural persons, income derived from intangible assets, income derived from certain regulated financial services activities, and income derived from immovable property, with the exception of transactions with Free Zone Persons relating to commercial immovable property located in a Free Zone.
Earning revenue from ‘Excluded Activities’ or any other non-Qualifying revenue’ will disqualify a Free Zone Person from the regime, subject to de minimis requirements. To meet the de minimis requirements, the non-qualifying revenue earned by a Free Zone Person should must not exceed the lower of either 5% of their total revenue or AED5,000,000.
Drawback of Qualifying Free Zone Status
A qualifying free zone person cannot be a part of a tax group and they cannot transfer their tax losses which puts them at a serious disadvantage. If you operate under the free zone, you also need to be mindful of the pricing obligations under the corporate tax law. You also need to prepare annual audited financial statements to resume your free zone status.
Conclusion
Free zone companies can enjoy considerable tax benefits as compared to mainland businesses and persons, but they are still not very different from the other companies. There are certain conditions where a free zone company is subjected to 0% tax.
So, if you are based in a free zone in UAE, it is time you evaluate your tax status based on the conditions mentioned here and plan accordingly.
