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Free Zone Corporate Tax in UAE

The United Arab Emirates (UAE) has proven to be one of the leading business destinations. Its good corporate tax regime has helped in this. The corporate tax framework in the UAE has evolved significantly in the last few years with the introduction of a federal corporate tax regime in 2023. Against this backdrop, the Free Zones of the UAE have emerged as a critical component of the country's economic framework. They offer businesses a unique set of benefits that are not available elsewhere, such as tax exemptions, streamlined regulations, and world-class infrastructure. This overview will go into depth on the intricacies of the UAE's corporate tax system, focusing on the critical role that Free Zones play in economic growth and foreign investment.

Free Zone Corporate Tax

Here is the latest update on UAE Corporate Tax for Freezones

What are Free Zones in the UAE?

Free Zones in the UAE are geographic areas designated with special regulatory and economic privileges given to businesses to attract foreign investment and promote economic diversification. The zones function according to their rules and regulations, which vary from those applied to businesses operating outside the zones. Major free zone functions include:

Foreign Direct Investment (FDI) Attraction: Free zones try to attract international businesses by providing incentives such as tax exemptions and 100% foreign ownership.
Ease of Trade: Free zones simplify the customs procedures that make importation and exportation easier, hence increasing the efficiency of trade.
Economic Diversification: Free zones are promoting various industries, thus contributing to the overall aim of the UAE to diversify its economy away from reliance on oil revenues.

Free Zones in the UAE

The UAE has many free zones, each targeting a specific sector and industry. Some of the most prominent free zones are:

Jebel Ali Free Zone Authority (JAFZA): One of the largest and most established free zones, JAFZA targets logistics, manufacturing, and trade.
Dubai Multi Commodities Centre (DMCC): Specializes in commodities trading and offers a business-friendly environment for various sectors, including finance and technology.
Abu Dhabi Global Market, ADGM: It is one of the financial free zones that allows an international financial hub for international banking, asset management and fintech in the heart of Abu Dhabi.
The International Free Zone Authority IFZA: has a lower cost of establishing a company, regardless of sectors, due to its ease of doing business.

Benefits of Registering a Company in a Free Zone

100% Foreign Ownership: Whereas the mainland companies must find a local partner, businesses within the free zones can be owned 100% by foreign investors.
Tax Exemptions: The company will enjoy 0% corporate tax, no personal income tax, and exemptions of customs duty on imports and exports.
Repatriation of Profits: The investors are allowed to repatriate 100% capital and profits without any limitation.
Simplified Set-Up Process: A business is typically set up more speedily and simply in a free zone than it is in a mainland set-up.
World-Class Infrastructure Access: Free zones have developed office space, warehouses, and logistics support suited for industries.
Networking: In free zones, the community is made of similar-minded businesses which leads to collaboration and partnership.

What is the Corporate Tax Regime in UAE?

In the UAE, a free zone person means businesses that are set up and run in one of the country's free zones. These businesses enjoy special tax breaks and rules that help attract foreign investment. This term can include both individual business owners and companies.

Natural Person

A natural person is a natural person in the UAE corporate tax context, who has business activities and generates business income. These persons may have to pay corporate tax as well if their business income crosses a particular threshold. More specifically, business income by a natural person exceeding AED 1 million must be subjected to corporate tax, whereas employment or investment income, not requiring any license, are not within the purview of tax.

Juridical Person

A juridical person is a legal entity which may be a corporation, partnership or limited liability company, recognised by law as having rights and obligations. All juridical persons in the UAE are liable to corporate tax on their taxable income, comprising profits arising from business carried out within the country.

What is Tax Applicability for Various Types of Entities?

The UAE corporate tax is applicable to different types of entities:

Mainland Companies: All businesses incorporated in the UAE are subject to corporate tax on their worldwide income.
Free Zone Companies: Qualifying free zone entities can benefit from a 0% corporate tax rate on certain types of income derived from eligible activities. However, they must adhere to specific regulatory requirements to maintain this status.
Foreign Companies with Permanent Establishments (PEs): Business entities of foreign entities operating through a PE in the UAE would be liable to corporate tax for income accruing from such activities.
Individuals with Commercial Licenses: The persons carrying on business under commercial license, either as proprietor or freelancer, would be liable to corporate tax also.

What are Special Tax Rules for Free Zone Companies?

Special provisions under the UAE corporate tax regime have been provided for the free zone companies:

0% Corporate Tax Rate: Qualifying free zone entities can benefit from a 0% tax rate on income derived from specific eligible activities. This is especially advantageous for businesses engaged in international trade or services.
Regulatory Compliance: To maintain their tax-exempt status, free zone companies must comply with economic substance regulations and ensure that their activities align with those permitted within their respective free zones.
Non-Qualifying Income: Any income not derived from qualifying activities may be subject to the standard 9% corporate tax rate applicable to other businesses.

Corporate Tax: Mainland vs Free Zones

The UAE applies different corporate tax rules for Mainland and Free Zone businesses. Here are the major differences :

Category	Mainland	Free Zones
Corporate Tax Rates	A 9% tax rate is applied to any income above AED 375,000.	Many Free Zone businesses are tax-free on "Qualifying Income" by meeting certain criteria.
Tax on Qualifying Income	Any income above AED 375,000 is taxed at the standard rate.	Likely exempted from tax on income generated from activities aligned with Free Zone objectives.
Activities Eligible for Tax Benefits	Can carry out activities anywhere in the UAE with no restriction.	Tax benefits apply to specific activities; non-permitted activities may be taxed at normal rates.
Trading Restrictions	Allowed to trade freely within the United Arab Emirates.	May face restrictions in Mainland trade; often need a local distributor or branch for Mainland sales.
Tax Compliance	Must follow FTA regulations; proper registration and auditing procedures are mandatory.	Must also follow FTA regulations; requirements are slightly easier if tax exemptions apply.

Find out more by reading A Quick Guide to Corporate Tax on Mainland and Free Zones

Qualifying FreezonePerson

Who Can Be a Qualifying Free Zone Person?

A Qualifying Free Zone Person is a business entity that has met certain criteria stipulated by the UAE Corporate Tax Law. For this to be so, the business entity must meet six essential conditions:

6 Conditions for Qualifying Free Zone Persons

Adequate Substance: The entity must ensure a minimum level of operating presences in the United Arab Emirates, which implies to have physical office spaces, employees, and being actually involved in business.
Source of Qualifying Income: Business shall earn income that qualifies by meeting the criteria as given under the Cabinet's definition made in Cabinet Decision No. 55 of 2023.
No Choice for Standard Corporate Tax: The entity must not have exercised its option to be subject to the standard corporate tax regime under the UAE Corporate Tax Law.
Compliance with Transfer Pricing Rules: The QFZP must adhere to the Arm's Length Principle and maintain proper transfer pricing documentation as required by law.
Economic Substance Regulations (ESR): The business must carry out substantial economic activity within the Free Zone, proving its contribution to the UAE economy.
No Excluded Activities: The entity must not engage in activities that are explicitly excluded from qualifying for the 0% corporate tax rate.

Understanding Qualifying Income

Qualifying Income denotes income that a Qualifying Free Zone Person derives from particular sources of activities that are eligible for a 0% corporate tax rate within the UAE Corporate Tax Law. This income is sourced through transactions and activities conducted within, or from, designated free zones.

Qualifying Income for Free Zone Persons

Qualifying income for free zone persons relates to:

Exported from the UAE: Income accrued from exporting goods outside the UAE.
Income from Other Free Zone Persons: Income earned through sales or services rendered to other businesses within the same or different Free Zones.
Particular Services: Services of specified types that fall under activities eligible for qualification by the Cabinet. These include manufacturing, processing, and trading of qualified goods.

Examples of What Constitute Qualifying Income and Non-Qualifying Income

Qualifying Income Examples

Sales to international customers where goods are shipped directly from the Free Zone.
Revenue from providing logistics services to other Free Zone entities.
Income from exploitation of intellectual property rights if it qualifies.

Non-Qualifying Income Examples

Income from activities carried out in mainland UAE.
Revenue from domestic sales within the UAE that do not qualify.
Earnings from investments in non-qualifying assets or properties outside the Free Zone.

Qualifying Activities and Non-Qualifying Activities

Qualifying Activities and Non-Qualifying Activities in UAE Free Zones

Conditions for Qualifying for the 0% Tax Rate

To benefit from the 0% corporate tax rate as a Qualifying Free Zone Person (QFZP), businesses must meet specific conditions related to their activities and income sources:

Adequate Substance: The business must maintain a physical presence in the Free Zone, including office space and employees.
Qualifying Income: Revenue must be derived from activities explicitly defined as qualifying under the UAE Corporate Tax Law.
No Election for Standard Corporate Tax: The entity must not opt to be taxed under the standard corporate tax regime.
Compliance with Transfer Pricing Rules: The business must adhere to transfer pricing regulations to ensure transactions are conducted at arm's length.
Economic Substance Regulations: The business must exhibit a significant level of economic activity in the Free Zone.
No Engagement in Excluded Activities: The business must not conduct activities that are explicitly excluded from qualifying for the 0% tax rate.

Taxation of Non-Qualifying Activities Within Free Zones

Non-qualifying activities conducted by QFZPs are subject to the standard corporate tax rate of 9%. Any income derived from these activities will not benefit from the 0% rate, potentially impacting the overall tax liability of the business.

Excluded Activities

Certain activities are explicitly excluded from qualifying for the 0% corporate tax rate, including:

Leasing Real Estate in Mainland UAE: Any income generated from leasing properties located outside the Free Zone.
Banking and Insurance Services: Financial services that do not qualify under the Free Zone tax regime.
Investment Income: Earnings from investments that do not meet qualifying criteria.
Activities Involving Domestic Sales: Sales made to customers within mainland UAE that do not meet qualifying income definitions.

Adequate Substance

For having Adequate Substance in UAE, two regulations needs to be followed

CIGA in Free Zone: Core income-generating activities (CIGA) must be carried out within the Free Zone.
Adequacy Test: Businesses must meet requirements for having adequate assets, a sufficient number of qualified employees, and appropriate operating expenses relative to their activities.

Outsourcing Activities

Outsourcing Activities can be outsourced to a related party or a third party within the Free Zone, provided the Qualifying Free Zone Person maintains adequate supervision over the outsourced activities.

What is the De Minimis Requirement?

As permitted under the UAE Corporate Tax Law and De Minimis requirement, Qualifying Free Zone persons may retain their 0 percent corporate tax on qualifying income should they have non-qualifying income; however their non-qualifying amount needs to be less than five percent of total revenue. Otherwise, their non-qualifying amount will be 5 million AED, or whatever is smaller.

Why is the De Minimis Requirement Important?

This requirement is intended to:

Support Free Zone Operations: Allow businesses to operate in Free Zones but permit some income from other sources.
Promote Compliance: Ensure companies comply with the UAE's corporate tax but benefit from a relatively friendly tax regime.
Maintain Eligibility: Permit companies with minimal non-qualifying income to remain eligible for the 0% tax incentive.

How Does the De Minimis Requirement Work?

Thresholds: The AED 5 million or 5% of total revenue whichever comes first, is the threshold of non-qualifying income for a QFZP.

Excluded from the calculation are:

Revenues from immovable properties in the Free Zone.
Incomes from permanent homes and establishments in the territory or abroad.

De-minimis Requirement

If a qualifying freezone person's non-qualifying income during a tax period does not surpass 5% of their total income for that tax period, or AED 5,000,000 (5 million dh), (whichever is lower), then the de-minimis requirement will be satisfied.

	Example 1	Example 2
Total Revenue	1,20,000,000	80,000,000
5% of Total Revenue	6,000,000	4,000,000
Threshold	5,000,000	5,000,000
Satisfies for De-Minimis Requirement	No	Yes

To calculate the 5% in De-Minimis Requirement

(Non-Qualifying Income ÷ Total Income) × 100

What is Free Zone Corporate Tax?

Free Zone Corporate Tax, is the tax levied by the Free Zone system that distinguishes between earnings of qualifying and non-qualifying income for Free Zone Business

0% Rate: Applies to QFZPs on their qualifying income, if particular conditions are fulfilled.
9% Rate: Applied on taxable income which does not qualify under the Free Zone provisions or exceeds De Minimis thresholds.

Tax Rates and Thresholds

Qualifying Income: This refers to income earned by businesses that benefits from a 0% corporate tax rate. There's also a threshold - any qualifying income up to AED 375,000 is exempt from tax.
Non-Qualifying Income: This income is subject to the standard corporate tax rate of 9%. It applies to income exceeding the AED 375,000 threshold or income derived from activities not classified as qualifying.
Special Rates for Large Multinationals: There are additional considerations for multinational corporations (MNCs) with very high global revenues. These companies may be subject to a different tax rate under the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit Shifting (BEPS) 2.0 framework.

This system creates a competitive tax environment, particularly for small and medium businesses, by offering a tax-exempt zone for a portion of their profits.

What is the Taxation Process for Free Zone Entities in the UAE?

Free Zone companies must register for corporate tax through the Federal Tax Authority (FTA) using the EmaraTax online portal. The steps are involved in the process:

Assess Business Activity: Companies should determine their income sources to identify qualifying income and segregate it from any mainland activities.
Maintain Documentation and Records: Businesses must maintain detailed financial records, including audited statements if they have qualifying income, to support their tax filings.
Register on the FTA Portal: Free Zone businesses must register on the EmaraTax platform and apply for a Tax Registration Number (TRN).
Provide Required Information: When registering, businesses must provide information regarding their legal structure, trade name, business activities, and ownership.
Submission of Essential Documents: Documents may include trade licenses, identification of authorized signatories, and proof of business activities.

Free Zone Entities Obligations Regarding Filing and Reporting

Once registered, Free Zone entities have the following filing and reporting obligations:

Annual Tax Returns: Free Zone companies are expected to file corporate tax returns yearly showing their income and expenses.
Consolidated Tax Return: They can file a single consolidated tax return instead of several returns for the different branches or entities.
Compliance with Regulations: Businesses must adhere to economic substance regulations and transfer pricing rules.

Freezone Corporate Tax Filing Documents

Freezone Corporate tax in the UAE is calculated based on the net profit reflected in the company's financial accounts. To file tax returns and determine the amount of Corporate Tax owed, maintaining specific financial documents is essential. Here are the documents needed to prepare for filing Corporate Tax in the UAE:

Financial statements for taxable income and exempt income calculation.
Receipts for deduction claims.
Records of asset depreciation for tax purposes.
Documentation on transfer pricing and related party transactions.
Information on financial reserve changes affecting taxable income.
Proof of exemption status.
Business loan documents for interest paid.
Records of foreign taxes paid.

Freezone Corporate Tax Filing Timeline

Corporations and businesses operating in UAE freezones must adhere to specific deadlines for filing Corporate Tax. Here is a detailed timeline to help ensure compliance:

Task	Description	Deadline
Tax Registration	Register with the Federal Tax Authority (FTA) for Corporate Tax.	Within 30 days of commencing business activities.
Tax Return Submission	Submit the annual Corporate Tax Return to the FTA.	Within 9 months from the end of the financial year.
Tax Payment	Settle the payable Corporate Tax amount.	Within 9 months from the end of the financial year
Deregistration	Submit a deregistration application if the business ceases operations.	Within 30 days of ceasing business activities.
Voluntary Disclosure	Submit a voluntary disclosure for any errors in the Tax Return or Tax Assessment	As soon as the error is discovered, preferably before notification of a Tax Audit
Declaration Submission	Submit any required declarations to the FTA	As specified by the FTA, usually within the same timeframe as the Tax Return
Notification of Change	Inform the FTA of any changes requiring amendments to tax record information.	Within 20 business days of the change occurring

Penalties for the Free Zone Corporate Tax

The UAE currently doesn't impose specific penalties related solely to the Free Zone corporate tax regime. However, the general UAE corporate tax framework outlines penalties for non-compliance that apply to both mainland and free zone businesses. Here's what you need to be aware of:

No.	Description of Violation	Administrative Penalty Amount in AED
1	Failure to keep required records and other information specified in the Tax Procedures Law and Corporate Tax Law.	10,000 for each violation; 20,000 for repeated violations within 24 months.
2	Failure to submit tax-related data, records, and documents in Arabic to the Authority when requested.	5,000
3	Failure to submit a deregistration application in the allowed period.	1,000 monthly, up to 10,000
4	Failure to inform the Authority of changes requiring amendment of tax record information.	1,000 monthly, up to 10,000
5	Failure of the Legal Representative to notify the Authority of their appointment within the specified timeframes.	1,000
6	Failure of the Legal Representative to file a Tax Return within the specified timeframes.	500 monthly for the first 12 months; 1,000 monthly thereafter.
7	Failure of the Registrant to submit a Tax Return within the specified timeframe.	500 monthly for the first 12 months; 1,000 monthly thereafter.
8	Failure to settle the Payable Tax.	14% per annum on the unsettled amount, calculated monthly.
9	Submission of an incorrect Tax Return.	500, unless corrected before the deadline.
10	Submission of a Voluntary Disclosure for errors in the Tax Return or Tax Assessment.	1% monthly on the Tax Difference, from the due date until the disclosure is submitted.
11	Failure to submit a Voluntary Disclosure for errors before notification of a Tax Audit.	15% fixed penalty on the Tax Difference; 1% monthly on the Tax Difference.
12	Failure to facilitate the Tax Auditor during a Tax Audit.	20,000
13	Late submission or failure to submit a Declaration to the Authority.	500 monthly for the first 12 months; 1,000 monthly thereafter.

How Corporate Tax Benefits for Free Zone Businesses

Free Zone businesses are to gain substantially from the corporate tax regime in the UAE:

0% Corporate Tax Rate: Qualifying income that arises from eligible activities shall be subject to a rate of 0%, if the entity meets all regulatory requirements.
Tax Incentives: The regime continues to respect the existing incentives for Free Zone businesses not undertaking mainland activities.
Flexibility in Filing: The self-assessment principle allows businesses to manage their tax affairs proactively while ensuring compliance with local laws.

Reyson Badger - Freezone Corporate Tax Consultant

Freezone Corporate Tax in the UAE can be tricky, but it’s important to get it right. Filing your taxes on time and correctly helps avoid penalties and keeps your business running smoothly. Reyson Badger’s team is here to help you with every step, making sure you meet all the rules and requirements. With our full guidance , you can focus on growing your business while we handle your tax needs. Trust Reyson Badger to keep your tax matters in order, so you can achieve your business goals without any worries.