Quick Guide to Mainland and Free Zone Corporate Tax

Written By Akshaya Ashok, Reviewed By Nouphal P C

Published on 12/04/2024

Over the years, the United Arab Emirates has gradually made its way into the shortlist of countries that boast an unmatched business environment, attracting an increasing number of entrepreneurs and multinational businesses. As this nation continues its growth and development, it is important for businesses operating in the UAE to know about corporate tax. Corporate Tax UAE Free Zone and mainland regimes are particularly complex due to differing rules and regulations governing these areas. It is important to know such complexities because businesses can comply, minimize taxes, and maximize profits. This article is a guide to corporate tax in the UAE with reference points on all aspects of corporate tax between mainland and free zone areas and the importance of compliance and professional advice.

Corporate Tax on Mainland UAE

In the UAE, the corporate tax regime was introduced on June 1, 2023, establishing a 9% corporate tax rate on net profits exceeding AED 375,000. Businesses earning below this threshold benefit from a 0% tax rate, which is particularly advantageous for startups and small enterprises. The following entities are exempt from corporate tax:

• Government Entities: Federal and emirate-level government bodies.
• Public Benefit Organizations: Non-profit entities engaged in public benefit activities.
• Natural Resource Companies: Companies involved in extracting natural resources may be subject to emirate-level taxation instead.
  
  

Taxable Income and Deductions

Taxable income for corporate tax purposes includes all revenue generated by a business after allowable deductions. Businesses can claim deductions for various expenses, including:

• Operating costs (salaries, rent, utilities)
• Depreciation of assets
• Interest expenses
• Other necessary expenditures related to generating taxable income
  
  

Tax Registration and Filing Requirements

All businesses operating on the mainland must register for corporate tax with the Federal Tax Authority (FTA) to obtain a Tax Registration Number (TRN). Key requirements include:

• Tax Registration: Mandatory registration with the FTA for all entities subject to corporate tax.
• Annual Tax Returns: Businesses must file annual tax returns within nine months after the end of their financial year, detailing taxable income and claiming any applicable deductions.
• Payment of Taxes: Taxes owed must be paid by the specified due date following the submission of annual returns.
  
  

Corporate Tax in UAE Free Zones

Free Zone Corporate Tax offers significant advantages for businesses. Free Zone companies can benefit from a 0% corporate tax rate on qualifying income derived from activities conducted outside the UAE or transactions between Free Zone entities. However, if they engage in business activities with mainland companies, they may be subject to the standard 9% corporate tax rate on revenues generated from those transactions.

Tax Benefits and Incentives for Free Zone Companies

Free Zone companies enjoy several advantages, including:

• Full Foreign Ownership: Unlike mainland companies, Free Zone entities can be fully owned by foreign investors without needing a local partner.
• Repatriation of Profits: Businesses can repatriate 100% of their profits and capital without restrictions.
• No Import/Export Duties: Many Free Zones offer exemptions from customs duties on goods imported or exported from the zone.
• Tax Holidays: Some Free Zones provide long-term tax holidays, allowing businesses to operate without paying taxes for extended periods.
  
  

Limitations and Restrictions on Tax Exemptions

While Free Zone companies enjoy significant tax benefits, there are limitations:

• Compliance Requirements: To maintain eligibility for the 0% tax rate, companies must adhere to economic substance regulations and ensure that their income qualifies under specific criteria set by the FTA.
• Non-Qualifying Income: Any income that does not meet the qualifying criteria will be taxed at the standard 9% rate.
• Geographical Limitations: The tax exemptions apply only to income earned within the Free Zone; any income generated from mainland operations may be subject to corporate tax.

Differences between Mainland and Free Zone Corporate Tax

Comparison of Corporate Tax Rates and Exemptions

The corporate tax regime in the UAE distinguishes between mainland businesses and those operating in Free Zones:

• Mainland Corporate Tax:
  
  
  • A standard 9% corporate tax applies to taxable income exceeding AED 375,000.
  • Businesses earning less than AED 375,000 are taxed at 0%.
  • Certain entities, such as government bodies and charities, are exempt from corporate tax.
    
    
• Free Zone Corporate Tax:
  
  
  • Qualifying Free Zone Persons (QFZPs) can benefit from a 0% corporate tax rate on qualifying income derived from activities outside the UAE or transactions with other Free Zone entities.
  • Non-qualifying income generated from mainland operations is subject to the 9% corporate tax rate.
    
    

Differences in Tax Registration and Filing Requirements

• Mainland Registration:
  
  
  • Must register with the Federal Tax Authority (FTA) for a Tax Registration Number (TRN).
  • Required to file annual tax returns detailing taxable income and expenses within nine months after the end of their financial year.
    
    
• Free Zone Registration:
  
  
  • Also required to register with the FTA and obtain a TRN.
  • Must file annual tax returns but may have different reporting requirements based on their qualifying status.
  • QFZPs must maintain separate books for Free Zone and mainland activities to continue benefiting from the 0% tax rate.
    
    

Implications for Businesses Operating in Both Mainland and Free Zone Areas

Businesses operating in both mainland and Free Zone areas face unique challenges:

• Mixed Income Sources: Companies must accurately segregate their income to determine which portions qualify for the 0% tax rate versus those subject to the standard rate.
• Compliance Complexity: Maintaining compliance with both sets of regulations can be complex, requiring diligent record-keeping and understanding of applicable laws.
• Potential for Increased Tax Liability: If not managed properly, income derived from mainland operations could lead to increased tax liabilities due to the application of the higher tax rate.
  
  

Compliance Requirements and Penalties for Corporate Tax

Compliance with Corporate Tax UAE Free Zone regulations is essential for all businesses

• Tax Registration: All entities must register with the FTA to obtain a TRN.
• Annual Tax Returns: Businesses are required to file annual returns detailing their taxable income, deductions, and any applicable exemptions.
• Record-Keeping: Companies must maintain accurate financial records, including documentation supporting claimed deductions and income sources.
  
  

Penalties for Non-Compliance

Failure to comply with corporate tax regulations can result in significant penalties:

• Late Filing Penalties: Businesses that fail to file their tax returns by the due date may incur fines, which can escalate over time.
• Late Payment Penalties: Unpaid taxes may attract interest charges, increasing the overall amount owed.
• Disqualification from Exemptions: Failure to meet compliance requirements may lead to disqualification from enjoying lower tax rates or exemptions, resulting in higher tax liabilities.
  
  

Importance of Seeking Professional Advice

Given the complexities of the UAE's corporate tax regime, seeking professional advice is crucial:

• Expert Guidance: Professional advisors can help businesses navigate the intricacies of tax regulations, ensuring compliance while maximizing available benefits.
• Risk Mitigation: Consulting with experts can reduce the risk of errors that could lead to penalties or loss of exemptions.
• Strategic Planning: Professionals can assist in developing strategies that align with business goals while ensuring adherence to regulatory requirements.
  
  

Conclusion

Understanding Free Zone Corporate Tax and other UAE tax frameworks is important for businesses. It helps them navigate tax rules and stay compliant. This guide emphasizes that tax rates and rules vary significantly between mainland and Free Zone areas, making it essential for businesses to keep up with the details.

At Reyson Badger, our tax experts are here to help. We offer tailored advice to maximize tax benefits while ensuring compliance. Seeking professional help can avoid costly mistakes and penalties. By staying informed and working with experts, businesses in the UAE can grow and succeed with confidence in their tax strategies.

Written By

Akshaya Ashok

Akshaya Ashok is a content writer specializing in creating content focused on accounting and auditing. With over two years of experience, she has developed expertise in crafting professional content for the financial sector.