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In recent years, the United Arab Emirates (UAE) has undergone significant tax law changes that will impact businesses in the country. The Federal-Decree Law No. 47 of 2022 stipulates that corporations, including free zone entities, will soon be subject to corporate tax (CT) in the UAE. Businesses will be liable for CT from the beginning of their financial year, starting on or after June 1, 2023. In this blog, we will discuss the impact of corporate tax on UAE free zone companies and what businesses can do to prepare.
What is Corporate Tax?
Corporate tax is a direct tax that applies to a business’s net taxable income. In the UAE, the general rate of CT will be 9%. The imposition of corporate tax aims to enable the UAE to achieve its strategic objectives through investments in development and innovation. Additionally, the UAE aims to position itself as a leading global business hub through an extensive network of double taxation treaties.
What is the Impact of Corporate Tax on UAE Free Zone Companies?
A free zone is an area in the UAE designated and defined as such by the Cabinet based on a Ministerial suggestion. A free zone person (FZP) is a legal person, such as a limited liability company or limited liability partnership, incorporated or registered in a free zone, including a branch of a non-resident person. Free zones are essential in attracting foreign investment to the UAE, and special corporate tax rules have been introduced.
A free zone company that earns qualifying income (a qualifying free zone person) is subject to 0% tax, while a 9% corporate tax applies to non-qualifying income. To qualify as a qualifying free zone person (QFZP), a business must meet specific requirements. These conditions include carrying out adequate workforce, assets, and income-generating activities in the UAE, managing and controlling the business in the UAE, earning qualifying income, not opting out of the free zone tax regime, and meeting transfer pricing rules and documentation.
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 from owning shares, royalties, or capital gains through investing in mainland companies will be subject to 0% tax.
Even if a free zone company is designated as a QFZP, the filing requirements for corporate tax remain the same. However, as corporate tax is still developing in the UAE, further information on the collection, due dates, and procedures will be available soon.
How Can We Help?
As tax experts in the UAE, Abacus Tax & Accounting can help businesses take advantage of tax relief and navigate the new federal corporate income tax laws. Introducing corporate tax will undoubtedly affect business plans, strategies, and legal agreements. By working with us, we can help you prepare for and comply with the new laws to ensure your business thrives in the UAE.
Conclusion
In conclusion, introducing the corporate tax in the UAE will impact free zone companies, previously exempt from corporate tax. While free zone companies are subject to the same tax regime as mainland companies, there are rules that allow free zone companies to qualify for a preferential 0% rate. To qualify, businesses must meet specific requirements and earn qualifying income. As corporate tax is still developing in the UAE, businesses should prepare further information on the collection, due dates, and procedures. By working with experts like Abacus Tax & Accounting, businesses can take advantage of tax relief and ensure compliance