Introduction
According to the recent law changes in the UAE, specifically Federal-Decree Law No. 47 of 2022, corporations, including free zone entities, are soon going to be taxable in the UAE. As per the law, businesses will be liable for corporate tax from the beginning of their financial year, starting on or after June 1, 2023.
What?
Corporate tax (CT) is a direct tax that applies to the business’s net taxable income. The general rate of CT in the UAE would be 9%.
Why?
The imposition of corporate tax will enable the UAE to achieve its strategic objectives through investments in development and innovation. Furthermore, through an extensive network of double taxation treaties between the UAE and other countries, the UAE will position itself as a leading global business hub.
How?
The Federal Tax Authority (FTA) will be responsible for collecting and enforcing CT. However, further information on the collection, due dates, and procedures will be available soon.
The case of UAE free zone persons (FZPs); the impact of corporate tax:
A free zone is an area in the UAE that has been designated and defined as such by the Cabinet based on a Ministerial suggestion. A free zone person is a legal person (e.g., a limited liability company or limited liability partnership) incorporated or registered in a free zone. This includes a branch of a non-resident person.
Free zones play an essential role in the UAE economy, especially with respect to attracting foreign investment. Therefore, the UAE government introduced special corporate tax rules in this regard. Generally, a free zone company that earns qualifying income (a qualifying free zone person) is subject to 0% tax. However, a 9% corporate tax applies to non-qualifying income. The tax rates for a QFZP will be as follows:
- Qualifying Income: 0%
- Taxable income that is not qualifying income: 9%
To qualify as a QFZP, the business must meet specific requirements. Let’s go over these conditions below.
What is a qualifying free zone person (QFZP)?
To qualify as a QFZP, the business shall satisfy the following conditions:
1) Adequate workforce, assets, and income-generating activities are carried out in the UAE. Furthermore, the business should be managed and controlled in the UAE.
2) The business should earn qualifying income.
3) The entity has not made an election to opt out of the free zone tax regime.
4) Transfer pricing rules, and documentation are met.
If any of the above conditions are not met, standard corporate tax rates should apply from the beginning of the financial year when the business failed to meet the requirements or opted out of the FZ tax regime.
What is a qualifying income?
Qualifying income is income derived by the FZP through transactions with businesses located outside the UAE, within the same free zone, or in any other free zone in the UAE. If non-passive income is derived from the UAE’s mainland, then the income sourced from the mainland will be subject to standard tax rates. However, the remaining income will be subject to a 0% rate. Passive income derived from owning shares, royalties, or capital gains through investing in mainland companies will be subject to 0% tax.
Filing requirements for free zone companies:
Even if the free zone company is designated as a QFZP, the need to file for corporate tax will remain the same. The subject of corporate tax is still developing in the UAE; therefore, there is a lot of further information due from the FTA.
Conclusion:
Free-zone companies are considered similar to other companies in the UAE for tax purposes. However, there are certain rules where a free zone company is subject to a preferential 0% rate, termed QFZP. To qualify as QFZP, the business must have adequate substance in the UAE, not opt out of the free zone tax regime, and earn qualifying income. Qualifying income is the revenue generated from transactions with free zone companies within the UAE region and any company outside the UAE. A QFZP will have to file for corporate tax in any case.
How can we help?
Many UAE businesses will face a difficult journey across unfamiliar terrain as they prepare for and comply with the new federal corporate income tax. Despite much ambiguity, UAE corporate tax will affect business plans, strategies, and legal agreements.
As your local experts, we know what you can expect from the final law and how it will affect the operation of your entire business. Taking advantage of tax relief is one of the most important things your UAE business can do to survive and thrive. Creative Zone Tax & Accounting can undoubtedly help with that!
Tax experts at Creative Zone Tax & Accounting can help your UAE business take advantage of tax relief.
