UAE Corporate Tax Rules for Free Zones: What You Need to Know

The UAE has recently issued two important decisions that clarify the application of the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. These are the Cabinet Decision No 55 of 2023 and the Ministerial Decision No. 139 of 2023, which were released on 30 May and 1 June 2023, respectively. These decisions have brought significant changes to the taxation landscape in the UAE, especially for businesses operating in Free Zones.

What are Free Zones?

Free Zones are special economic zones in the UAE that offer various incentives and benefits to businesses, such as 100% foreign ownership, 100% repatriation of capital and profits, exemption from customs duties, and simplified procedures. There are more than 40 Free Zones in the UAE, each with its own rules and regulations.

What are the new tax rules for Free Zones?

According to the Federal Decree-Law No. 47 of 2022, a company is subject to corporate tax if it is a UAE resident and carries on a business in the UAE. A company is considered a UAE resident if it is incorporated in the UAE or has its place of effective management in the UAE. However, the Cabinet Decision No 55 of 2023 and the Ministerial Decision No. 139 of 2023 have introduced some exceptions and clarifications for companies operating in Free Zones. These are:

Qualifying Income Tax Rates:

A company that is a Qualifying Free Zone Person is subject to a 0% tax rate on its Qualifying Income, and a 9% tax rate on its Taxable Income that is not Qualifying Income. A Qualifying Free Zone Person is a company that is incorporated in a Free Zone and meets certain criteria, such as having a valid license, having a physical presence, and conducting a permitted activity.

Qualifying Income Definition:

Qualifying Income is income derived from transactions with Free Zone Persons (excluding Excluded Activities), transactions with Non-Free Zone Persons, limited to Qualifying Activities (excluding Excluded Activities), and other income, subject to meeting de minimis requirements. Qualifying Activities are activities that are related to the core business of the company and are specified in the Ministerial Decision No. 139 of 2023. Excluded Activities are activities that are excluded from the scope of Qualifying Income, such as transactions with natural persons (with some exceptions), regulated banking, finance, leasing, and insurance activities, ownership or exploitation of intellectual property assets, and ownership or exploitation of immovable property (with some exceptions).

De Minimis Threshold:

A company can include other income in its Qualifying Income, subject to meeting a de minimis threshold. The de minimis threshold is AED 5,000,000 or 5% of the total revenue of the company, whichever is lower. The de minimis threshold is applicable to the company's activities, and may vary depending on the legal requirements and jurisdiction of the company.

What is the impact of the new tax rules for Free Zones?

The new tax rules for Free Zones offer a favorable tax environment for Qualifying Free Zone Persons, as they can enjoy a 0% tax rate on their Qualifying Income, which may constitute a significant portion of their revenue. This encourages Qualifying Free Zone Persons to engage in transactions and activities within Free Zones, and to comply with the criteria for being a Qualifying Free Zone Person. The new tax rules also provide clarity and certainty for businesses operating in Free Zones, as they can now determine their tax liability and obligations based on the definitions and criteria provided by the decisions. This reduces the risk of ambiguity and disputes with the tax authorities. The new tax rules also align with the UAE's vision and strategy to diversify its economy, promote innovation, and attract foreign investment. By offering a competitive and transparent tax regime for Free Zones, the UAE can enhance its position as a leading business hub in the region and the world.

How can we help you?

If you are a business operating in a Free Zone, or planning to set up a business in a Free Zone, you need to be aware of the new tax rules and how they affect you. You need to assess your tax status, identify your Qualifying Income and Taxable Income, and comply with the tax filing and reporting requirements. We can help you with all your tax needs, from tax advisory and compliance, to tax optimization and planning. We have a team of experienced and qualified tax professionals who can provide you with personalized and tailored guidance. We can help you navigate the complex and dynamic tax landscape in the UAE, and ensure that you are compliant and efficient.

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📞 Contact us today to find out how we can help you with your tax matters in the UAE. 🌐 www.aeon-global.com 📧 naveed@aeon-global.com 📱 00971-50-1653764