UAE Corporate Tax: What It Means for Your Business
The UAE has long been recognized as a global financial center and a leading business hub in the Middle East. Its favorable business environment offers numerous benefits to both local and foreign investors, one of the most attractive being the 'nil' tax on profits earned within the country, with a few exceptions. However, in December 2022, the UAE government announced the introduction of a Federal Corporate Tax (CT law), which took effect on June 1, 2023.
As per the new UAE Corporate Tax framework, a 9% taxation rate is applied to annual taxable income exceeding AED 375,000 for companies that do not meet the conditions for Qualifying Free Zone Persons (QFZPs). For businesses operating within Free Zones, the tax rate remains at 0% on qualifying income, provided they meet specific criteria set by the tax authorities. Non-qualifying income for QFZPs is taxed at 9%.
If you are a business owner operating in a Free Zone, this comprehensive guide will help you navigate the new Corporate Tax regulations and understand their impact on your business.
Background of the New Corporate Tax Law
To fully grasp the implications of the new Corporate Tax structure for Free Zone-based companies, it is essential to understand the key aspects of the new Federal Corporate Tax system.
Corporate Tax Structure for Mainland Companies:
- A taxable person is subject to a 0% tax rate on taxable income up to AED 375,000.
- A 9% corporate tax applies to taxable income above AED 375,000.
Corporate Tax Structure for Free Zone Companies:
- A 0% corporate tax applies to the qualifying income of businesses recognized as a Qualifying Free Zone Person (QFZP).
- Non-qualifying income in the Free Zone is subject to a 9% corporate tax, although other exceptions or relief may apply.
This new tax structure affects all businesses operating in the UAE, including foreign businesses with offices here. The impact of corporate tax varies depending on whether the business is located in a Free Zone or on the Mainland. Read more about Free Zone or on the Mainland company setup. Understanding these changes is crucial for ensuring compliance and avoiding tax penalties such as fines and interest charges.
Understanding the Context of 'Person' in UAE Tax Law
To understand the impact of corporate tax on Free Zone businesses, it is important to distinguish between the types of 'Persons' defined in UAE Tax Law:
Natural Person: This includes freelancers, sole proprietors, and individuals in civil companies. While these individuals may enjoy some Free Zone benefits, their income will still be subject to Corporate Tax, similar to businesses outside the Free Zones.
Juridical Person: This refers to corporations and partnerships. These businesses can be eligible for a 0% CT rate on qualifying income if they meet the criteria set out in UAE tax laws.
Only Juridical Persons meeting specific qualifying criteria can be classified as "Qualifying Free Zone Persons" (QFZPs) and benefit from the 0% corporate tax rate on their qualifying income.
Who Can Be a Qualifying Free Zone Person?
To be recognized as a QFZP under the new UAE Corporate Tax regime, businesses must meet the following criteria:
- Maintain Adequate Substance in the UAE: Your business should have a significant presence in the UAE, including physical premises and employees.
- Generate Qualifying Income: Income should primarily come from compliant business activities conducted within the Free Zone or with international clients.
- Do Not Elect to Be Part of Normal CT Rates: You should not choose to be taxed under the standard corporate tax rates applicable to non-Free Zone businesses.
- Non-Qualifying Revenue Does Not Exceed the De Minimis Threshold: Non-qualifying income should be below 5% of total revenue or AED 5 million, whichever is lower.
- Have Audited Financial Statements in Accordance with IFRS: Maintain accurate financial records and have them audited in line with International Financial Reporting Standards (IFRS).
- Meet Other Specific Conditions Prescribed by the Free Zone Authority: Comply with any additional requirements set by the respective Free Zone authority.
The definition of a Free Zone is established, but the Cabinet Decision listing the designated Free Zones is still pending. Until this decision is announced, it is advisable to confirm with the Free Zone authority whether your Free Zone is eligible for Corporate Tax relief.
What is Qualifying Activity?
According to Cabinet Decision No 265, business activities for Corporate Tax purposes are divided into three categories: Qualifying Activities, Excluded Activities, and Other Activities. Only Qualifying Activities are considered for Free Zone Tax Relief.
Qualifying Activities include:
- Manufacturing of goods or materials
- Processing of goods or materials
- Trading of Qualifying Commodities
- Holding of shares and other securities for investment purposes
- Ownership, management, and operation of ships
- Reinsurance services
- Fund management services
- Wealth and investment management services
- Headquarter services to Related Parties
- Treasury and financing services to Related Parties
- Financing and leasing of aircraft
- Distribution of goods or materials in or from a Designated Zone
- Logistics services
- Activities ancillary to the above Qualifying Activities
What is Qualifying Income?
Qualifying Income refers to the income eligible for a 0% corporate tax rate in Free Zone entities. The determination of qualifying income depends on the nature of transactions and the involved parties.
- Transactions with Another Free Zone Person: Income from transactions within the same Free Zone can be considered qualifying income.
- Transactions with a Non-Free Zone Person: Income from transactions outside the Free Zone may not be considered qualifying income.
- Income from Other Transactions: Other income can be considered qualifying if it satisfies the de minimis requirements.
Qualifying income does not include income generated from domestic (mainland) or foreign permanent establishments, immovable property outside the Free Zone, and certain other activities like income from non-commercial properties.
Understanding the De Minimis Tax Rule
The De Minimis Rule is crucial in the new UAE Corporate Tax for Free Zone regulations. This rule states that if a QFZP's non-qualifying income is less than 5% of total revenue or AED 5 million, whichever is lower, they can still benefit from the 0% tax rate.
For example, if your total revenue is AED 10 million and your non-qualifying income is AED 400,000 (4% of total revenue), your business can still benefit from the 0% tax rate because the non-qualifying income is below the 5% limit.
Certain types of income are excluded from these calculations, including revenue from immovable property within the Free Zone and income from domestic or foreign permanent establishments.
How Does Corporate Tax for Free Zones Impact Businesses?
The introduction of the UAE Corporate Tax for Free Zones has significant implications. If a business no longer qualifies for a 0% tax rate, the additional tax burden could pose financial challenges. It is crucial for Free Zone businesses to take steps to manage expenses effectively and prevent unnecessary cash leakages.
Automating expense management with a robust spend management solution can help:
- Identify Tax-Deductible Expenses: Manage cash flow in real-time and ensure maximum tax deductions.
- Save Time and Money: Reduce potential errors in tax filing with automated expense management.
- Gain Valuable Insights: Obtain insights into company spending to plan strategic cost-control measures.
Partner with Affinitas DMCC
Navigating the complexities of the new UAE Corporate Tax regime requires expert guidance. Affinitas DMCC offers comprehensive support to help your business comply with tax regulations and optimize financial management.
Affinitas DMCC: Your Partner in Emiratisation Success
Navigating the complexities of Emiratisation can be daunting. Affinitas DMCC offers comprehensive HR solutions to help businesses achieve their Emiratisation goals:
- Compliance Support: Ensure your business adheres to all Emiratisation regulations and documentation requirements.
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Contact Us
For personalized assistance and more information on the UAE Free Zone tax, contact Affinitas DMCC. Our team of experts is dedicated to helping your business thrive in the UAE's dynamic business environment.
