From June 2023, a corporate tax of 0% or 9% may be subjected to Free Zone Businesses and Qualifying Free Zone Persons based on their Qualifying income. However, Mainland Businesses had to face a standard 9% tax rate based on their taxable income which exceeds AED 375,000. The UAE is all to execute this new tax policy introduced by the Federal Tax Authority (FTA) and the Ministry of Finance- Corporate Tax, which will be in effect from June 2023.
The legislative Corporate Tax rate is 9%. In this session, we cover the tax structure of the UAE, with an analysis of the impact of Corporate Tax on businesses in - the Mainland and Free Zone.
Corporate Tax in Free Zones
A free zone is a recognized and defined geographic region within the state that is stated in a Cabinet decision made at the Minister's request. The UAE, to be specific, the Emirates of Dubai and Abu Dhabi are home to various Free Zones. Most Free Zones influence companies and have seen many multinational as well as small and medium-sized companies registering 100% foreign-owned subsidiaries, not depending on a domestic shareholder.
Most Free Zone Companies in the UAE have been considered vital motives for international trade. Free Zones enjoy umpteen exemptions such as 100% foreign ownership, 100% customs and VAT exemptions, 100% returns on capital & profits, corporate tax exemptions, etc.
The new Corporate Tax Law enables the UAE government to accomplish the agenda of economic transformations with growth, as tax exemptions to certain Free Zones play the role of a multiplier, making sure the specific conditions are met.
The conditions on tax exemptions in Free Zones might collide with other amenities of the existing laws, such as the effect on the existing Economic Substance Regulations (ESR). It is still being determined about further changes in the UAE ESR following the implementation of Corporate Taxes.
Ministry of Finance pointed out that businesses registered in Free Zones would be impacted by the new Corporate Tax. However, it was observed that the tax incentives provided by the Free Zones would be honored by the new system for businesses that meet the compliance requirements and do not conduct domestic businesses with the Mainland UAE companies or entrepreneurs.
Will Free Zones Be Affected By Corporate Tax?
Corporate Tax will affect the businesses in the free zones of the UAE. However, the free zone businesses adhering to the regulatory requirements and not conducting business in the Mainland UAE would enjoy the corporate tax benefits.
Free Zones are required to register themselves and file corporate returns.
As per the Federal Decree Law on Corporate Income Tax,
A Qualifying Free Zone Person must pay Corporate Tax at the following rates:
- 0% (zero percent) on Qualifying Income.
- 9% (nine percent) on Taxable Income that is not Qualifying Income.
The specific qualifying income for a free zone person or a Free Zone entity is yet to be informed by the FTA. However, the corporate tax for businesses on Mainland becomes precise and is calculated based on the taxable income earned by the business.
Corporate Tax in Mainland, UAE
The UAE has captivated umpteen wealthy investors from all over the world to fortify their presence in the region and enjoy one of the most superior tax policies in the world in a government with multiple interdependent double taxation agreements signed with countries globally.
The tax authorities, such as the Ministry of Finance in the UAE declared that Corporate Tax would be introduced in the Emirates to eliminate international tax-evading practices and combine the efforts with the tax departments of other countries to set a minimum global tax rate for multinational companies. This is referring to the agreement declared by the OECD (Organization for Economic Cooperation and Development) with over 130 countries globally with an aim to set a tax rate at 15% for multinationals.
Tax rates for Mainland
Presently the updated Corporate Tax would be charged on the profits cited from the commercial activities in the country. The profit tax rate for Mainland enterprises will be 9% on profits earned domestically. The taxable profit level starts at 375,000 AED. Profits less than this amount are not taxed.
The only category of activity impacted by a separate Corporate Tax at a specific Emirate level is the extraction of natural resources. Similarly, certain businesses are eligible to come under corporate tax exemptions by meeting the required conditions. However, small businesses with taxable income up to AED 375000 will be charged 0% to accelerate the development of startups.
Moreover, the Corporate Tax of 9% is comparatively low among the global financial centers, for instance, Hong Kong charges a CIT of 16.5% for businesses attaining profits in the Hong Kong region.
Who is a Qualifying Free Zone Person? A Qualifying Free Zone Person is one who fulfills the conditions of a Free Zone Person in this Decree-Law and is liable to Corporate Tax of 0% taxable income.
Conditions for Qualifying Free Zone Person
Let’s see about Article 18 of Corporate Tax law below which covers the conditions for one to become a Qualifying Free Zone Person.
1. A Qualifying Free Zone Person meets all of the following conditions:
- Maintains adequate substance in the State.
- Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister.
- Has not elected to be subject to Corporate Tax under this Decree-Law.
- Complies with Arm’s Length Principle and Transfer Pricing Documentation of this Decree-Law
2. A Qualifying Free Zone Person who fails to fulfill any of the standards set forth in the above points at any point during a Tax Period ceases to be a Qualifying Free Zone Person as of the start of that Tax Period.
3. In the event that a person fails to fulfill the preceding criteria, the Minister may prescribe the conditions or circumstances under which a person may continue or cease to be a Qualifying Free Zone Person as of a different date.
4. The 9% taxable income to a Qualifying Free Zone Person shall apply for the remainder of the tax incentive period stipulated in the applicable legislation of the Free Zone in which the Qualifying Free Zone Person is registered, which period may be extended in accordance with any conditions as determined in a decision issued by the Cabinet at the Minister's suggestion, but no one period shall exceed (50) fifty years.
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