Corporate Tax in the UAE's Freezone and Mainland
Corporate Tax in the UAE’s Freezone and Mainland
Both mainland and free zone entities are covered by UAE corporate tax. The actual distinction is not “tax vs. no tax,” but rather whether a Free Zone entity can meet the Qualifying Free Zone Person (QFZP) requirements to be eligible for the 0% rate on Qualifying Income and whether it can maintain those requirements year after year.
Why UAE Corporate Tax Is Important
The UAE’s business-friendly atmosphere has long been praised. The nation gave zero corporate income tax for the majority of industries for many years, and this is still mostly the case today. But things are changing when the federal corporate tax was implemented in 2023 at a rate of 9% for qualifying profits.
Corporate Tax in the UAE for Mainland Businesses
The Federal Decree-Law No. 47 of 2022 fully imposes corporate tax on UAE mainland businesses. This implies that, unless otherwise specified, any earnings made from commercial endeavors—both domestically and internationally—are subject to taxation. The objective is to establish a transparent, equitable tax system that promotes the nation’s long-term economic growth.
1. Thresholds and tax rates:
Mainland companies pay taxes at:
- 0% on up to AED 375,000 in taxable income
- 9% on over AED 375,000 in taxable income
While larger companies contribute equitably depending on their income, this tiered approach makes sure small and medium-sized enterprises aren’t overworked.
2. How Local and Foreign Income Are Handled:
Both domestic and foreign profits are subject to UAE corporation tax since mainland businesses must disclose and pay tax on their worldwide income. To prevent double taxation, foreign income that has already been taxed in another nation may be excluded or credited.
3. Requirements for Compliance:
In order to maintain compliance, mainland businesses need to:
- All taxable individuals, including those who benefit from the 0% threshold, must register. Businesses need to get a Tax Registration Number (TRN) by registering with the Federal Tax Authority (FTA) through the EmaraTax portal.
- Accounting Standard: In order to determine taxable income, financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS) or other UAE-accepted accounting standards.
- Filing and Payment: Within nine months following the conclusion of the applicable fiscal year, an annual corporate tax return must be submitted to the FTA, and any taxes owed must be paid.
- Maintaining Accurate Records: All financial statements, invoices, and supporting documentation must be kept on file for a minimum of seven years.
- Transfer Pricing: Mainland businesses must make sure that any transactions involving local or foreign Related Parties adhere to the widely accepted Arm’s Length Principle.
UAE Corporate Tax for Free Zone Businesses
The UAE’s free zones have long been well-liked for their business-friendly atmosphere and tax breaks. Free zone businesses may still benefit from some tax advantages under the new corporation tax law, but these will depend on whether they are eligible for special status.
1. Free Zone Companies’ Corporate Tax Rate
The corporate tax is applied to free zone entities as follows:
- 0% on qualified income (provided the business satisfies all QFZP requirements)
- 9% on income that isn’t eligible or if the business doesn’t keep its QFZP status
This strategy ensures equity for all UAE companies while allowing legitimate free zone enterprises to maintain their tax benefit.
2. Qualifying and Non-Qualifying Income
Free zone businesses pay taxes according to the kind of revenue they generate:
Qualifying income is exempt from corporate tax at 0%.
Non-qualifying income is liable to the regular corporate tax rate of 9%.
Qualifying income includes:
- Deals with other businesses in the free zone
- Revenue from clients outside of the United Arab Emirates
- The Ministry of Finance’s list of regulated activities
Non-qualifying income includes:
- revenue from commercial operations carried out on the mainland of the United Arab Emirates (unless it’s regarded as a “passive” source like rent or dividends)
- Any revenue that doesn’t fit the requirements
3. What does a Qualifying Free Zone Person (QFZP) entail?
A firm registered in a UAE free zone that satisfies the requirements to receive a 0% corporate tax rate on qualifying income is known as a Qualifying Free Zone Person (QFZP).
In order to qualify as a QFZP, a company needs to:
- Preserve sufficient economic substance in the United Arab Emirates
- Obtain the legally defined eligible income.
- Not choose to pay taxes on the mainland
- Respect transfer pricing and additional FTA rules.
The business will lose its eligibility and pay 9% tax on all income if any of these requirements are not fulfilled.
4. Requirements for the 0% Tax Status
A Free Zone business must meet the following five non-negotiable requirements in order to stay a QFZP and take advantage of the 0% rate:
- Maintain Adequate Substance: The business must show that it has a significant physical presence, which includes:
There are enough Core Income Generating Activities (CIGA) taking place in the Free Zone.
sufficient personnel, assets, and operational costs in the Free Zone in relation to its business operations.
- Derive Qualifying revenue: Subject to the De Minimis criterion, the bulk of its revenue must fit the criteria of “Qualifying Income.”
- No Election for regular Rate:The business must not have freely chosen to pay the regular 9% corporate tax in the United Arab Emirates.
- Adhere to Transfer Pricing: The Arm’s Length Principle and associated paperwork requirements must be followed in all transactions with related parties, whether inside and outside the UAE.
- Audited Financial Statements: Generally speaking, QFZPs must create and keep up audited financial statements.
IBR Group UAE Make Corporate Tax Easy for You
At first, corporate tax may seem a little complex, particularly when mainland and free zone enterprises are subject to different regulations. However, knowing how it relates to your company might help you make better plans and steer clear of unpleasant surprises down the road. IBR Group UAE can help if you’re unsure about how to go or where your business fits in.
Our staff can assist free zone enterprises with qualifying income, assist with corporate tax registration and filing, and provide both mainland and free zone businesses with useful tax advice.