Corporate Tax for UAE Free Zone Companies

Free Zones are an integral part of the UAE economy that continue to play a critical role in driving economic growth and transformation both in the UAE and internationally. When considering corporate tax for free zone companies in the UAE, it is crucial to consult the specific regulations and guidelines of the relevant free zone authority where the company is situated. Each free zone may have its own distinct rules concerning taxation, including aspects such as the duration of the tax holiday, eligibility criteria, and other tax-related matters, which can vary between different free zones.

It’s worth noting that while free zone companies may be exempt from corporate tax within the free zone itself, they may still be subject to taxes on certain activities or transactions conducted outside the free zone, such as customs duties, value-added tax (VAT), and withholding tax.

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    Free Zone Persons - Corporate Tax

    The UAE Ministry of Finance has recently issued two decisive resolutions that outline the key aspects of the Corporate Tax system concerning legal entities operating within the UAE’s free zones. These resolutions are as follows:

    1. Cabinet Decision No. 55 of 2023, which delineates the criteria for qualifying income.
    2. Ministerial Decision No. 139 of 2023, which identifies the activities that are deemed as qualifying and excluded under this tax regime.

    The Free Zone Corporate Tax regime is not just limited in its application to designated areas within the Free Zones, wherein it is meant to govern income derived solely from activities conducted within these Free Zones. According to the guidelines, ‘Qualifying Income’ comprises income from transactions with other Free Zone Persons, as well as domestic and foreign sourced income resulting from engaging in any of the ‘Qualifying Activities’.

    What is the tax treatment for Qualifying Free Zone Persons under the UAE Corporate Tax regime?

    Under the UAE Corporate Tax regime, Qualifying Free Zone Persons enjoy a favourable tax treatment based on their activities and business transactions. Specifically, the Free Zone persons are subject to a free zone corporate tax rate of 0% on their taxable income derived from Qualifying Activities and transactions conducted with other Free Zone Persons. However, it’s important to note that this tax exemption does not apply if the income is derived from an Excluded Activity.

    In scenarios where a Qualifying Free Zone Person operates beyond the confines of a Free Zone and establishes a Permanent Establishment in the mainland UAE or a foreign country, the profits attributable to such Permanent Establishment become subject to the standard UAE Corporate Tax rate of 9%.

    To avoid the possibility of foreign Permanent Establishment profits being taxed twice, both in the UAE and in the foreign country of operation, the UAE provides relief from Corporate Tax through an extensive double tax treaty network, as stated in the UAE Corporate Tax Law.

    Furthermore, certain income arising from Immovable Property within a Free Zone is also subject to the 9% Corporate Tax rate. This pertains to income derived from transactions involving Commercial Property with non-Free Zone Persons and income generated from residential units, hotels, or other Immovable Property that is not classified as Commercial Property, irrespective of the payor’s identity.

    For clarification, “Commercial Property” refers to Immovable Property situated within a Free Zone, exclusively utilized for conducting a Business or Business Activity, and not used as a residence or accommodation.

    According to Article 101 of the Civil Transactions Law, Immovable Property is defined as “Anything which is settled and fixed in its space and cannot be moved without deterioration or alteration of its shape.”

    What are the Qualifying Activities & Excluded Activities?

    The below table lists the Qualifying Activities & Excluded Activities as stated in the Ministerial Decision.

    Qualifying ActivitiesExcluded Activities
    • Manufacturing of goods or materials.
    • Processing of goods or materials.
    • Holding of shares and other securities.
    • Ownership, management and operation of Ships.
    • Reinsurance services that are subject to the regulatory oversight of the competent authority in the State.
    • Fund management services that are subject to the regulatory oversight of the competent authority in the State.
    • Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
    • Headquarter services to Related Parties.
    • Treasury and financing services to Related Parties.
    • Financing and leasing of Aircraft, including engines and rotable components.
    • Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale.
    • Logistics services.
    • Any activities that are ancillary to the activities listed in paragraphs (a) to (l) of this Clause.
    • Any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) of Clause (1) of Article (2) of this Decision.
    • Banking activities that are subject to the regulatory oversight of the competent authority in the State.
    • Insurance activities that are subject to the regulatory oversight of the competent authority in the State, other than the activity specified under paragraph (e) of Clause (1) of Article (2) of this Decision.
    • Finance and leasing activities that are subject to the regulatory oversight of the competent authority in the State, other than those specified under paragraphs (i) and (j) of Clause (1) of Article (2) of this Decision.
    • Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.
    • Ownership or exploitation of intellectual property assets.
    • Any activities that are ancillary to the activities listed in paragraphs (a) to (f) of this Clause.

     

    De – Minimis Requirement

    A Qualifying Free Zone Person can maintain eligibility for the free zone corporate tax regime as long as their revenues from non-qualifying transactions and activities in a Tax Period do not surpass the lower of 5% of their total revenues or AED 5 million.

    Notably, revenues stemming from a domestic or foreign Permanent Establishment of the Qualifying Free Zone Person, as well as revenues derived from property situated within a Free Zone but ineligible for the Free Zone Corporate Tax regime, are not considered for the de minimis calculation. Such income is subject to the standard UAE Corporate Tax regime.

    When the de minimis requirements are satisfied, any non-Qualifying Income earned during that Tax Period will also be subjected to a 0% Corporate Tax rate.

    On the other hand, the Free Zone Person will no longer be eligible for the corporate tax on free zone for a minimum of five (5) years if the de minimis standards are not reached or if they fail to continue to comply with other requirements. During this period, the Free Zone Person will be treated as an ordinary Taxable Person, subject to Corporate Tax at the standard rate of 9% on their Taxable Income above AED 375,000.

    Seeking Feedback on Proposed Framework

    Following the publication of the Corporate Tax Law and implementing decisions relating to the application of corporate tax on Free Zones, the Ministry of Finance has issued this Consultation Paper to solicit feedback on certain elements of the proposed framework for the classification of Qualifying Activities and Excluded Activities outlined in Ministerial Decision 139 of 2023. This will enable the Ministry to assess the requirement of detailed clarification on certain key matters of the Free Zone guidelines published via Ministerial and Cabinet Decision.

    This Consultation Paper is produced solely to solicit feedback from interested parties and does not constitute the final legislative stance on the issues addressed herein. You should wait until final legislation or guidance is provided before acting on any proposals made in this Consultation Paper. The feedback should be submitted through the form (Click Here to access the form) by August 2, 2023.

    HLB HAMT to Assist!

    HLB HAMT is here to lend a helping hand to individuals and businesses alike. As a reputable and trusted advisory firm, we are committed to providing exceptional financial and business solutions tailored to your unique needs. Our team of experienced professionals is well-equipped to assist you with all kinds of assistance for corporate tax free zone companies.

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    Call our experts at +971 4 327 7775 or email tax@hlbhamt.com to schedule a meeting.

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