The introduction of corporate tax in the UAE divides the region into two parts concerning tax obligations. These are segregated into mainland and free zone areas. Depending on the nature of the business, an entity might register in either the UAE mainland or a free zone area. However, there are different tax consequences in both cases. In this blog, we discuss the distinguishing responsibilities related to corporate tax in the mainland vs. the free zone in the UAE. But first, we will look at the basic terms to better grasp the key concepts.
Corporate Tax in Mainland vs Free Zone in the UAE
One of the crucial decisions in the business setup is to select the right geographical region for your business registration. Why is this important? The following explanation will explain the purpose.
Mainland
The local authorities and relevant economic departments govern the mainland economic area of the UAE. Entities registered in the mainland can trade freely within the UAE and internationally and are subject to general UAE government jurisdiction and laws. Furthermore, firms aiming to do business in these zones may need a local sponsor. In the UAE, the mainland refers to main cities and commercial hubs such as Dubai, Sharjah, and so on.
Free Zone
On the other hand, a free zone refers to a designated economic area that operates under specific regulations. They offer tax incentives to businesses; however, firms have to limit their business with mainland companies. One of the prime benefits of a free zone area is that firms enjoy 100% repatriation of profits and less restrictive exports and imports. Key free zones in the UAE include Jebel Ali Free Zone (JAFZA), Dubai International Financial Centre (DIFC), and so on.
Corporate Tax – Mainland vs. Free Zone
One of the core business responsibilities includes corporate tax obligations. Let’s highlight some key differences between mainland and free zone entities concerning the corporate tax.
Tax Rate
Mainland businesses have a 9% corporate tax rate for taxable income of over AED 375,000 in a tax year. Therefore, taxable income below this threshold will be subject to a 0% rate.
Taxable income > AED 375,000
Tax rate: 9%
Taxable income <= AED 375,000
Tax rate: 0%
On the other hand, a free zone entity has tax incentives and may enjoy a 0% corporate tax rate. However, there are certain conditions. To attain a 0% rate, a business must satisfy conditions to become a qualified free zone person (QFZP). These include maintaining adequate substance in the free zone, earning qualifying income as per the tax law, and complying with transfer pricing regulations. As a result, a free zone entity will have the following tax rates:
Qualifying Income: 0%
Non-qualifying Income: 9%
The key point here is that there is no threshold for free zone businesses. The rule is simple: 0% for qualifying income and 9% for non-qualifying income.
Scope of Corporate Taxation
For mainland entities, corporate tax applies to all business activities. However, there are exceptions for governmental entities and some qualifying public benefit entities, such as charities. Furthermore, businesses are entitled to deduct allowable expenses, for instance, operating expenses.
In addition to the qualifying and non-qualifying rule, a free zone entity may lose its qualified free zone person status due to increased engagement with mainland businesses. Therefore, it is important to consider such factors at the registration phase of business.
Withholding Tax
To promote business in the region, the UAE government currently has a 0% withholding tax (WHT) policy for both mainland and free zone economic zones. This includes 0% WHT on domestic and international payments.
What to Choose Between a Mainland and a Free Zone for Your Business?
Well, there can be various factors that businesses must consider; however, there are some key considerations. If a business aims to sell its products or services to the local market in the UAE, then the ideal way is to register in the mainland area. However, a free zone may be preferential for firms with less local interaction. Furthermore, firms must look into other specific circumstances and long-term goals.
Conclusion
A comparison of corporate tax in the mainland vs. the free zone in the UAE is an eye-opener for businesses operating or looking to enter the UAE market. Concerning the corporate tax obligations, the key difference between the two is the applicable tax rate. Businesses operating on the mainland will generally be subject to a 9% rate if their taxable income crosses the threshold of AED 375,000 in a tax year. This means that small businesses or start-ups with taxable income of up to AED 375,000 in a year will be subject to a 0% rate. For a free zone business, there is no threshold generally; 0% rate for qualifying income and 9% for non-qualifying income. There are some other differences too; however, the key is to decide the best economic zone suited to specific circumstances.
Creative Zone Tax & Accounting (CZTA)
The choice of the best zone, a mainland or a free zone, is crucial for the overall success of your business. As an expert for start-ups in the UAE region, our team is well-versed in the nitty-gritty of both areas of registration. Even if you are an established business, we can assist you in better management of your compliance responsibilities. Give us a call today; contact us.
