The UAE introduced a 9% corporate tax on June 1, 2023, impacting free zones which are the key to 40% of Dubai’s non-oil trade. The blog “Tax Implications of Corporate Tax in UAE Free Zones” explores this shift. Historically tax-free, free zones now face rules for Qualifying Free Zone Persons (QFZPs) to retain 0% rates on profits over AED 375,000. Compliance is tricky, driving demand for corporate tax consultants in Dubai to navigate qualifying income and the de minimis rule. Let’s go!
What’s This Corporate Tax All About?
First things first, let’s get a quick lay of the land. The UAE rolled out its federal corporate tax (CT) on June 1, 2023, under Federal Decree-Law No. 47 of 2022. It’s a flat 9% rate on taxable income above AED 375,000 (about $102,000). For profits below that threshold, you’re in the clear, no tax. Simple enough, right? But here’s where it gets interesting: free zones, which have historically been tax-free zones, are now part of this conversation.
Not all free zone businesses are automatically exempt. The UAE government has thrown in a lifeline called the “Qualifying Free Zone Person” (QFZP) status, which lets eligible companies keep their 0% tax perk. But there are strings attached, and that’s what we’re here to unpack.
Free Zones and the 0% Tax Dream: Still Exist?
The good news is that free zones haven’t lost their charm entirely. If your business qualifies as a QFZP, you can still enjoy a 0% corporate tax rate on certain income. The bad news? Not every free zone company makes the cut, and the rules can feel like a bit of a maze.
To qualify as a QFZP, your business needs to tick a few boxes:
- Primary Operations in a Free Zone: Your company must be registered and physically operating in a free zone.
- Substance Over Form: You need to show real economic activity like employees, office space, and actual operations, not just a shell company.
- Qualifying Income: The 0% rate only applies to specific types of income.
- No Mainland Deals: If you trade with UAE mainland companies (outside free zones), your income might not qualify for the 0% rate.
- Compliance: You must keep proper books, be audited, and follow the tax authority’s rules.
If you meet these criteria, congratulations! You’re still in the tax-free club! But if you don’t, that 9% tax could creep in, especially on income that doesn’t fit the “qualifying” bucket.
Qualifying Income: What’s In and What’s Out?
Let’s break down this “qualifying income” thing because it’s the heart of the free zone tax story. If your business earns income that fits the QFZP mold, you will have no tax. Here’s what typically counts:
- Exports: Selling goods or services outside the UAE? That’s qualifying income.
- Intra-Free Zone Transactions: Trading with other free zone companies? Also tax-free.
- Certain Passive Income: Depending on the specifics, interest or royalties from free zone sources can qualify.
Now, here’s where the plot thickens. Income that doesn’t qualify gets hit with the 9% tax. Examples include:
- Mainland Transactions: If you are selling to a business in Dubai’s mainland, then, that’s taxable.
- Permanent Establishment Outside Free Zones: If you’ve got a branch or office elsewhere in the UAE or abroad that’s not in a free zone, profits from there could be taxed.
- Non-Qualifying Activities: If your free zone company dips into activities outside its license scope, you might lose the exemption.
Confused yet? Don’t sweat it because you have Herald, the leading corporate tax consultant in Dubai. Actually, the key takeaway is that free zone businesses need to keep a sharp eye on where their money’s coming from. Mixing mainland and free zone income could mean a tax bill you weren’t expecting.
The De Minimis Rule: What’s the Deal?
Even if you’re a QFZP, you can’t have too much non-qualifying income without losing your 0% status. The UAE tax authority sets a threshold, 5% of your total revenue or AED 5 million (whichever’s lower). If your non-qualifying income stays below this, you’re still safe. Cross it, and boom, your entire profit could face the 9% tax.
If you’re running a free zone trading company. Most of your sales are exports (tax-free), but you pick up a few mainland clients for convenience. If those mainland deals push you over the de minimis limit, your whole operation could lose the exemption.
Double Taxation: What About International Ties?
Are you running a global business from a UAE-free zone? You might wonder how this corporate tax plays with taxes in other countries. The UAE has double taxation agreements (DTAs) with over 100 nations, which can help avoid paying tax twice on the same income. If your free zone company is taxable at 9% on some profits (like mainland income), you could claim credits or exemptions abroad, depending on the treaty.
But, if you’re a QFZP enjoying 0% tax, some countries might not recognize that as “tax paid,” which could complicate things. Chat with an expert in company tax service in UAE who knows the ins and outs of your target markets, it’s worth it.
Practical Tips: How to Stay Tax-Savvy in Free Zones
How do you keep your free zone business on the right side of this tax shift? Here are some actionable steps:
- Audit Your Income Streams: Map out where your revenue is coming from – exports, free zone deals, mainland sales – and see what is taxable.
- Get Your Paperwork in Order: The UAE tax folks want audited financials. Sloppy books could cost you your QFZP status.
- Rethink Mainland Moves: Tempted to tap the mainland market? Weigh the tax hit against the profit potential.
- Hire a Pro: Tax laws are tricky. A UAE tax consultant can save you headaches (and cash) down the road.
- Stay Updated: The rules are still fresh, and clarifications keep rolling out. Keep an ear to the ground.
