Freezone UAE Corporate Tax Update 2024

Freezones UAE Corporate Tax Update 2024

Freezones UAE Corporate Tax Update 2024, free zone companies can benefit from a 0% corporate tax rate under specific conditions. Here's an easy guide to help free zone entities understand the basics of complying with the new tax laws while retaining their tax advantages.

Eligible for a 0% Corporate Tax Rate

A Free Zone Person is eligible for a 0% tax rate on certain forms of income, known as Qualifying Income, until the tax incentive period ends. To obtain this designation, a Free Zone Person must:

• Generate Qualifying Income through approved transactions.
• Maintain significant business operations in the UAE.
• Meet the minimal revenue requirements for non-qualifying activities (de minimis).
• Comply with transfer pricing regulations and keep all required documentation.
• Prepare and maintain audited financial statements in accordance with the Corporate Tax Law.

Thomas Vanhee's advice regarding the distinction between free zones and designated zones for corporate income tax purposes is important for taxpayers in the UAE.

Free Zone vs. Designated Zone:

• A Free Zone is an area where certain tax benefits and exemptions are provided to businesses operating within its boundaries.A Designated Zone refers to specific areas within the UAE that are considered outside the customs territory for VAT purposes. These zones may also have special tax considerations.

Qualifying Activities in Designated Zones:

• For goods distribution from a designated zone to be considered a qualifying activity, they don't necessarily need to physically enter the UAE. This includes scenarios like third-country trading (high sea sales).Goods purchased by a free zone company in a designated zone can come from the mainland and still qualify as a qualifying activity when exported. Activities involving goods movement from mainland to mainland within a designated zone also qualify.

Processing of Goods:

• The concept of processing goods extends beyond manufacturing alone. Commodities trading doesn't require actual trading on a commodity exchange; potential tradability suffices. This is particularly relevant for industries like oil and gas, gold, and agricultural products.

Qualifying Free Zone Person Status:

• A Free Zone person doesn't lose their qualifying status if they haven't started earning qualifying income yet. Investing excess cash as a Free Zone person, even within related parties, qualifies as a financing activity.

Financial Reporting:

• Qualifying Free Zone persons are not mandated to prepare separate financial statements for their qualifying income and other income.
• Understanding these distinctions and criteria is crucial for businesses to optimize their tax benefits within Free Zones and designated zones in the UAE. It's advisable for taxpayers to verify their status and activities with their respective zones to ensure compliance and maximize tax advantages.

 Reyson Badger is happy to explain the CT Law for businesses in the Free Zone of the UAE. Here's the details,

The CT Law says that if your business is in the Free Zone and meets certain conditions, you can pay 0% tax on some types of income. This is good because it means you can save a lot of money on taxes. But for other types of income, you might have to pay 9% tax.

To make things clearer, the government made two important decisions called Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023. These decisions talk about what activities qualify for the 0% tax rate, what activities don't, how to calculate taxes, and other important rules.

But even with these decisions, some things were still a bit confusing. That's why the Federal Tax Authority (‘FTA’) made a guide called the FZP Guide. This guide explains everything in detail so businesses can understand and follow the tax rules correctly.

Qualifying Free Zone Person (QFZP) Status:

• To benefit from a 0% tax rate on specific income types, your business needs to qualify as a QFZP.
• Qualification criteria include being the true beneficiary of the income, maintaining separate revenue for tax purposes, and adhering to startup phase rules.

Tax Rates:

• While income qualifying for QFZP status enjoys a 0% tax rate, other types of income may be taxed at 9%.

Government Decisions and FTA Guide:

• Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023 define which activities are eligible for the 0% tax rate.
• To further clarify these decisions, the Federal Tax Authority (FTA) released the FZP Guide.

Key Clarifications from the FZP Guide:

• Being a QFZP: This section elaborates on what it means to be the true beneficiary of income, how to segregate revenue correctly for tax purposes, and the specific rules during the startup phase.
• Substance Requirements: Your business must have a substantial presence in the Free Zone, including qualified employees, proper assets, and operational expenses. The guide uses practical examples to explain these requirements.
• Permanent Establishments (PEs): Guidelines are provided on how to handle situations where your business has offices outside the Free Zone.
• Qualifying vs. Excluded Activities: Clear examples are given to differentiate between activities that qualify for the 0% tax rate and those that don't. Specific insights are provided regarding distribution activities, such as physically importing goods and the "high-sea sales model."
• Loss of QFZP Status: Non-compliance with the outlined rules can lead to losing the special tax benefits. The guide outlines how this can happen.

Role of the FZP Guide:

While the FZP Guide is not a law itself, it serves as a valuable tool for businesses to understand and maximize their tax benefits within Free Zones. The FZP Guide is like a helpful tool to understand and follow the tax rules. Stay informed with the Freezones UAE Corporate Tax Update 2024 to adapt and thrive in these zones.  Reyson Badger is here to help businesses understand this guide and get the most benefits from the tax rules in the Free Zone.Our team can give advice and support to make sure businesses are doing everything right with their taxes.