The introduction of corporate tax in the UAE marked a significant shift for businesses, particularly those operating in free zones. While many believed that free zone companies would be fully exempt, the truth is different, and it depends on specific conditions set by the law.
In this blog, we debunk some common myths and explain the real implications of corporate tax in UAE freezones. Understanding UAE freezone corporate tax law can help a business stay compliant and make smarter decisions.
Back to topWhat Should You Know About UAE Freezone Corporate Tax?
Let us clear up some of the myths about UAE freezone corporate tax and find out what the real rules actually are.
Myth 1: Free zone companies are entirely exempt from corporate tax.
Fact: All free zone businesses have to follow the UAE freezone corporate tax rules, no matter what kind of activity they are engaged in. Some business structures may have ‘exempted income’ or get charged at zero rate of corporate tax, but only if they are a ‘qualified free zone person’, with a ‘qualifying income’, and meet six conditions set by the Federal Tax Authority (FTA).
Myth 2: Free zone companies don’t need to register or file a corporate tax return.
Fact - All free zone entities, as per the timelines mentioned by the FTA in Federal Decree-Law No. 47 of 2022, must register for UAE freezone corporate tax and file annual returns within 9 months of the tax year end. This is a legal obligation under the UAE corporate tax law.
Myth 3: All trading companies established in designated free zones can avail zero rate of corporate tax.
Fact - A free zone trading company must check if it fulfils the rules of UAE freezone corporate tax to enjoy the benefit of zero rate. Only those who meet the requirements can claim this benefit through the corporate tax portal. It is not applied automatically.
Myth 4: Create tax group of freezone and mainland companies to offset losses.
Fact: If a business set up in UAE free zone opts for the zero rate corporate tax regime, it cannot form a tax group with a mainland company. Tax grouping is only allowed if the free zone entity chooses not to claim the zero rate and shares at least 75 percent common ownership with the mainland company.
Myth 5: Businesses need not follow the arm’s length principle.
Fact: ree zone companies opting for zero corporate tax, i.e., qualified freezone persons, must follow the arm’s length principle for any related-party and connected persons transactions. This is one of the key compliance requirements under UAE freezone corporate tax, in addition to all the other conditions mentioned in the tax law.
Myth 6 Audited financials are not required until turnover exceeds AED 50 million.
Fact: If you qualify as a qualified free zone persons, then the business must mandatorily submit audited financial statements, no matter the turnover. Additionally, you will need to declare the details of the auditor when filing tax returns.
Myth 7: Income from consulting mainland clients is exempt.
Fact: Professional services provided by free zone companies to clients in the mainland are considered non-qualifying activity. They are subjected to a corporate tax of 9 percent, and the non-qualifying income is added for de minimis calculation.
Back to topTakeaways
As the UAE corporate tax law’s framework continues to evolve, it is essential for free zone businesses to identify myths, as it can lead to non-compliance, penalties, and more. We, at Commitbiz, help free zone businesses in the UAE confidently navigate the complexities of corporate tax. From FTA registration to tax filing and eligibility checks for zero corporate tax, we ensure full compliance. We offer services related to corporate tax, accounting and bookkeeping, and compliance to ensure accurate documentation and audits, enabling businesses to stay compliant and maximise tax benefits. Contact us to learn more about UAE freezone corporate tax.
Back to topWhat is ‘de minimis’ in UAE freezone corporate tax regulations?
It is a small allowance for non-qualifying income. If non-qualifying income stays below a set threshold, the company may still qualify for the zero rate. The de minimis requirements are met where the non-qualifying revenue in a tax period does not exceed the lower of:
• AED 5,000,000, or
• 5% of total revenue (calculated as the total amount of non-qualifying revenue over total revenue).
What is a ‘qualifying person’ in UAE free zones?
A qualifying person is a company that meets six specific conditions under UAE tax law, allowing it to benefit from the zero corporate tax rate on qualifying income. To be treated as a qualifying person, the company must:
- Derive qualifying income from relevant transactions.
- Maintain adequate substance in the UAE.
- Satisfy the de minimis requirement for non-qualifying income.
- Have not elected to be subject to corporate tax.
- Comply with transfer pricing rules and documentation requirements under the Corporate Tax Law.
- Prepare and maintain audited financial statements for the purposes of the Corporate Tax Law.
Are there penalties for non-compliance with freezone tax rules?
Yes. Failing to register, file returns, or comply with corporate tax obligations can result in penalties and fines issued by the FTA.
