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Starting from June 1, 2023, the corporate tax law will be applied in UAE at a rate of 9%. Companies in the UAE that make over 375,000 AED (approximately USD 100,000) will have to pay a 9% tax on their profits (revenue minus expenses). However, businesses that earn less than this amount will not be taxed and will continue to have a 0% tax rate.
Are you considering starting a business in UAE but unsure where to set it up? You may be confused about whether to choose Mainland or the Free Zone. Corporate tax is an essential component of business operations in the UAE, and it is vital to understand the differences between corporate tax for Mainland UAE and corporate tax for Free Zones in UAE. Mainland businesses and Free Zone businesses have varying tax rates and rules, and it's crucial to understand them to avoid penalties and legal issues. This blog will guide you on applying the corporate tax to Mainland and Free Zones in UAE.
Legal entities such as LLCs, PSCs, PJSCs, LLPs and other companies with legal personalities will be taxed. Foreign companies earning income in UAE and are tax residents will also be taxed. Free Zone companies are exempted from corporate taxes if they comply with regulations. However, Free Zone companies involved in trading with mainland companies will be taxed. Both UAE residents and non-residents may be subject to corporate taxes.
In UAE, businesses earning less than AED 375,000 will not be taxed, while those earning more will be charged a 9% tax. Larger multinational companies with different business conditions may be charged a different tax rate.
Charities, public benefit organizations, investment funds, companies engaged in oil and resource extraction, and wholly government-owned companies are exempted from corporate tax. In addition, there is a participation exemption from corporate tax for receiving dividends or selling shares of a subsidiary company.
Corporate tax for Free Zones in UAE varies based on the type of business activity. Free Zone Persons can avail of a 0% corporate tax rate on income earned from transactions with businesses outside UAE or from trading with businesses within the same or any other Free Zone. However, if Free Zone companies engage in business activities with mainland businesses, they will be subject to corporate tax on the revenues generated.
The income earned by a Free Zone Person from its mainland business activities will be subject to the regular corporate tax rate if it has a branch in the UAE mainland. However, if the Free Zone Person maintains separate books of account for its mainland and Free Zone business activities, it can continue to enjoy the 0% corporate tax rate on its Free Zone income. But if there are no separate books, then the 9% tax rate will apply to both Free Zone and Mainland income.
Free Zone Persons without a mainland branch may still transact with companies in the mainland UAE. If the income earned from these transactions is limited to passive income, such as royalties, dividends, and capital gains from owning shares in Mainland companies, then the Free Zone Person can continue to enjoy the 0% corporate tax rate.
In case you are still unsure about the corporate tax regulations for Mainlands and Free Zones in UAE, feel free to contact Reyson Badger, a top accounting and auditing firm in the UAE. We can provide you with expert guidance and help you understand the tax laws and requirements for your business. Reyson Badger can assist you with all aspects of corporate tax for the mainland in UAE and corporate tax for Free Zones in UAE, ensuring that you comply with the regulations and minimise your tax liabilities.