UAE guidance on Free Zone Persons

Introduction

The Federal Tax Authority (FTA) last month released a comprehensive guide Link here detailing the conditions and procedures

for applying corporate tax to free zone persons. 

This guide aligns with the free zone tax regime, emphasising the significant role free zones play in the UAE’s economic growth and transformation, both locally and globally.

Benefits of Free Zones

Free zones offer numerous advantages for businesses, including:

•  fewer restrictions on foreign ownership, 

• simplified administrative procedures, 

• state-of-the-art infrastructure, and 

• a variety of legal entities and commercial activities. 

These benefits make free zones an appealing choice for businesses looking to establish operations in the UAE.

Qualifying for 0% Corporate Tax Rate

The guide specifies the conditions that a free zone person must meet to qualify for a 0% corporate tax rate on qualifying income. 

If these conditions are not met or cease to be met during any relevant tax period as prescribed by the FTA, the entity will lose its qualifying free zone status. 

Consequently, it will no longer benefit from the 0% corporate tax rate from the start of the tax period in which the conditions were not fulfilled and for the following four tax periods.

Income Treatment and Compliance Requirements

The guide also clarifies the treatment of income generated from immovable property and qualifying intellectual property, as well as tax compliance requirements.

It defines the qualifying and excluded activities for a free zone person, as outlined in Ministerial Decision No. 265 of 2023 concerning Qualifying Activities and Excluded Activities for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

Practical Examples

To enhance understanding, the guide provides examples illustrating the application of corporate tax laws to free zone persons. 

It details how corporate tax is calculated for free zone persons, identifying the qualifying income subject to the 0% tax rate and the income subject to a 9% tax rate. 

Additionally, it includes conditions for maintaining an actual and sufficient presence in the free zones and the criteria for determining a local or foreign permanent establishment.

Permanent Establishments

The FTA guide also specifies that when a qualifying free zone person operates through a permanent establishment in the UAE but outside the free zones, or in a foreign country, the profits of such permanent establishments will be subject to a corporate tax rate of 9%.

Conclusion

The new FTA guide provides essential information for businesses operating in free zones, ensuring they understand the conditions required to benefit from the 0% corporate tax rate and the implications of not meeting these conditions.

Final Thoughts

If you have any questions about this article on Free Zone Persons or UAE tax matters more generally,

please get in touch through our Mosaic Chambers website.