The UAE Federal Tax Authority (FTA) issued a corporate tax guide for the UAE Free Zone regime, under which qualifying Free Zone persons are subject to a 0% corporate tax rate on qualifying income, while other taxable income is subject to a 9% corporate tax rate.
A Qualifying Free Zone Person or a Free Zone firm is eligible for a special corporate tax rate of 0% on their “Qualifying Income.” The type of transactions the firm engages in determines this eligible revenue. Transactions made by a Free Zone firm outside of the United Arab Emirates will be taxed at zero percent. Nonetheless, the ordinary 9% corporation tax rate may apply to transactions that take place within the United Arab Emirates or that do not fit the qualifying requirements.

Concerns over the effect on UAE Free Zone transactions have grown among company owners since the UAE implemented the Corporate Tax. Given that tax incentives have been a key lure for companies operating in Free Zones, corporate tax specialists in Dubai think these worries are legitimate.

The corporate tax legislation, which outlines requirements for Free Zones and the taxable income of Free Zone people, was announced by the Federal Tax Authority (FTA) on December 5. The corporate tax public consultation paper states that “Free Zone Persons” are liable for taxes but may be eligible for tax breaks under certain circumstances.

Who Can be a Qualifying Free Zone Person?

The following requirements must be fulfilled if you run a business in a free zone in order to be eligible as a Qualifying Free Zone Person (QFZP) under the new UAE Corporate Tax Group regime:

• Maintain Adequate Substance in the UAE: Your company’s operational operations must be reflected in the UAE, where it must have a significant presence, including workers and physical office space.
• Create Qualifying revenue: The majority of your revenue should originate from legally acceptable business ventures, whether they are carried out in the Free Zone or with clients from other countries.
• Opt Out of ordinary corporation Tax Rates: You will not be able to take advantage of the Free Zone benefits if you choose to be taxed at the ordinary corporation tax rates that are applicable to enterprises that are not in the Free Zone.
• Below the De Minimis Threshold Non-Qualifying Revenue: Your non-qualifying income cannot be more than AED 5 million or 5% of your total revenue, whichever is less. You must maintain correct financial records and make sure they are audited in accordance with International Financial Reporting Standards (IFRS) in order to maintain verified financial statements.
• Respect Any Additional criteria Specified by the Free Zone Authority: You are required to fulfill any additional criteria specified by the applicable Free Zone authority.

The Cabinet Decision defining the selected Free Zones is still pending, even though the definition of a UAE Free Zone has been created. This implies that more information on which Free Zones in the UAE may qualify for business tax savings is anticipated. It’s best to check with your Free Zone authorities to see if your Free Zone is eligible for corporation tax relief before the choice is made.

Click to read more about How to Form a Tax Group Under UAE Corporate Tax Regime?

Knowing How to Apply the De Minimis Tax Rule

One of the main features of the UAE’s new corporate tax laws for free zones is the De Minimis Rule. This law states that you can still take advantage of a 0% tax rate if you are a Qualifying Free Zone Person (QFZP) and your non-qualifying income is less than 5% of your total revenue or less than AED 5 million, whichever is lower.

For instance, your company may still be eligible for the 0% tax rate if its total sales is AED 10 million and its non-qualifying income is AED 400,000, or 4% of its total revenue. This is because the non-qualifying income is less than the 5% barrier established by the De Minimis Rule.

It is crucial to remember that some forms of income are not included in these computations. This comprises income from domestic or foreign permanent establishments as well as income from real estate located inside the Free Zone. For example, the De Minimis Rule would not apply if you owned a building in the UAE Free Zone and received rental revenue from it.

Similarly, under this provision, revenue earned by a branch overseas or in the United Arab Emirates’ mainland is not regarded as qualified income. This exclusion makes sure that the advantage of the 0% tax rate is allocated to the operational income of Free Zone businesses rather than to revenue or passive income from operations conducted outside the Free Zone.

You shouldn’t believe that just because your firm is in a Free Zone, it immediately qualifies for the UAE’s 0% tax rate. To properly determine your company tax burden for the fiscal year, you must evaluate the sorts of assets you hold, your clientele, and the nature of your operations.

How Does Corporate Tax for Free Zone Impact Businesses?

The introduction of Corporate Tax for Free Zone transactions in the UAE brings significant changes that can affect their operations. If a business no longer qualifies for the 0% tax rate, it may face considerable challenges due to the added tax burden, potentially impacting financial growth. As a result, it is essential for businesses in the UAE to take proactive measures to minimize unnecessary cash outflows and optimize their taxation in the UAE.

Managing business spending effectively and preventing cash leaks may be achieved by automating your expense management process.

1. Determine Tax-Deductible Expenses: Accountax assists you with real-time cash flow management, guaranteeing that you maximize your company’s tax deductions.
2. Save Time and Money: Accountax reduces tax filing mistakes with automated expense management, which saves you time and money.
3. Get Useful Knowledge: Accountax is a consolidated system that provides insightful data about your business’s expenditures, assisting you in creating strategic plans to improve cost control.

Corporate Tax Advisors for Companies in Free Zones

Free Zone businesses can evaluate the possible effects of corporation tax on their revenue and earnings by speaking with corporate tax specialists in Dubai. One of the top corporate tax advisors, BMS Auditing, helps companies with efficient tax planning and preparation. They offer compliance, corporate tax evaluation and advisory, and serve as an agent to represent customers before the Federal Tax Authority (FTA) in the event that they get any notices pertaining to taxes.