Once known as a tax-free haven, the UAE made a landmark move in December 2022 by introducing a corporate tax regime, which officially took effect on June 1, 2023. While this shift reshapes the business landscape, Free Zone companies still have a competitive edge – provided they meet specific conditions. Understanding these regulations is crucial to maintaining tax benefits and ensuring compliance.
In this article, we explore the impact of UAE corporate tax on free zone entities and how companies in these areas are navigating the changes.
The Basics of UAE Corporate Tax – An Overview of the New Tax System
Federal Corporate Tax was introduced in the UAE for financial periods beginning on or after June 1, 2023. Before we delve into the Corporate Tax structure specific to Free Zone-based companies, let’s first examine the key components of the UAE’s newly introduced Federal Corporate Tax system.
For businesses operating on the UAE mainland, the tax framework is structured as follows:
- A 0% corporate tax rate applies to taxable income up to AED 375,000.
- A 9% corporate tax is levied on taxable income above AED 375,000.
In contrast, businesses based in Free Zones follow a different tax model:
- 0% corporate tax applies to the qualifying income of entities recognized as Qualifying Free Zone Persons (QFZP).
- Non-qualifying income in Free Zones is subject to a 9% corporate tax, although specific exceptions and reliefs may apply depending on circumstances.
This new tax structure is applicable to all businesses operating within the UAE, including foreign businesses that have offices in the country.
The motive behind the introduction of the Federal Corporate Tax was for the UAE to align with global standards, boost transparency, and drive long-term economic growth.
The Impact – How Corporate Tax Affects Free Zone Businesses
- Retaining Tax Benefits
Free zone businesses classified as “Qualifying Free Zone Persons” (QFZP) can enjoy a 0% corporate tax rate on income from qualifying activities. To maintain this benefit, these companies must avoid conducting non-qualifying activities and meet strict regulatory requirements.
- Transaction Scenarios and Qualifying Income
It’s essential to understand the types of transactions that qualify for the 0% tax rate in Free Zones. Below is a breakdown of different transaction types and whether the income generated from them qualifies for the 0% corporate tax:
| Transaction Type | Involved Parties | Qualifying Income? |
| Transaction with another Free Zone person | Business entity within the same Free Zone | Yes |
| Transaction with a non-Free Zone person | Entity outside the Free Zone | No |
| Income from all other transactions | All other transactions (meeting de minimis) | Yes |
These guidelines help ensure that Free Zone businesses are clear on what income qualifies for the 0% corporate tax rate. Businesses should evaluate their transactions accordingly and seek professional advice if needed to avoid any confusion.
- Understanding the De Minimis Rule
The De Minimis Rule applies that free zone businesses can retain the 0% corporate tax rate even if they earn some non-qualifying income, provided it remains below 5% of total revenue or AED 5 million, whichever is lower.
For example, a company with AED 10 million in total revenue and AED 400,000 in non-qualifying income (4%) would still qualify for the 0% tax rate.
How Creative Zone Tax & Accounting Can Help
At Creative Zone Tax & Accounting (CZTA), we provide expert guidance to help Free Zone businesses manage their Corporate Tax obligations while maximizing tax benefits. Our team ensures that businesses remain compliant, efficient, and well-prepared for evolving tax regulations.
Contact us at [email protected] for professional tax support tailored to your Free Zone business.
