Is Corporate Tax applicable on Freezone Persons?
In the UAE, a Free Zone Person is defined as an individual or corporate entity that is licensed to conduct business activities in the UAE free zones. Free zones are designated areas in the UAE that offer a multitude of incentives to foreign investors, including 100% foreign ownership, tax exemptions, and more. These free zones have become a significant driving force in attracting foreign investment and propelling economic development in the UAE.
A Free Zone Person that is a Qualifying Free Zone Person can benefit from a preferential Corporate Tax rate of 0% on their “Qualifying Income” only.
In order to be considered a Qualifying Free Zone Person, the Free Zone Person must:
- maintain adequate substance in the UAE;
- derive ‘Qualifying Income’;
- not have made an election to be subject to Corporate Tax at the standard rates;
- comply with the transfer pricing requirements under the Corporate Tax Law; and
- maintains audited financial statements
The Minister may prescribe additional conditions that a Qualifying Free Zone Person must meet.
If a Qualifying Free Zone Person fails to meet any of the conditions, or makes an election to be subject to the regular Corporate Tax regime, they will be subject to the standard rates of Corporate Tax from the beginning of the Tax Period where they failed to meet the conditions.
Applicable rates for Freezone Persons
| Taxable Income | Applicable Tax Rate |
| On Qualifying Income | 0% |
| Taxable income that is not Qualifying Income | 9% |
Irrespective of being a qualifying free zone person, every entity in the free zone must get registered and file a CT return.
If the pillar two rules are to be embedded in the UAE Corporate Tax regime, then qualifying free zone entities that are part of large multinational groups are subject to being charged a different CT rate.
What is qualifying income?
Qualifying Income of the Qualifying Free Zone Person shall include the below categories of income:
- Income derived from transactions with a Free Zone Person, except for income derived from Excluded Activities.
- Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities.
- Income derived from the ownership or exploitation of Qualifying Intellectual Property under Clause (1) of Article (7) of this Decision.
- Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements under Article (4) of this Decision.
What are the excluded activities referred to above?
- Transactions with natural persons, subject to few exceptions (ships, aircraft, fund, wealth, investment)
- Banking and Insurance (except reinsurance) activities
- Finance and leasing activities except related to :
- Treasury and financing to related party
- Related to aircrafts and prescribed components
- Ownership or exploitation of immovable property except for commercial property within FZ with FZ persons
- Ownership or exploitation of intellectual property assets
What are the qualifying activities referred to above?
The following activities conducted by a Qualifying Free Zone Person shall be considered Qualifying Activities:
- Manufacturing of goods or materials.
- Processing of goods or materials.
- Trading of Qualifying Commodities.
- Holding of shares and other securities for investment purposes.
- Ownership, management and operation of Ships.
- Reinsurance services.
- Fund management services.
- Wealth and investment management services.
- Headquarter services to Related Parties.
- Treasury and financing services to Related Parties.
- Financing and leasing of Aircrafts.
- Distribution of goods or materials in or from a Designated Zone.
- Logistics services.
- Any activities that are ancillary to the Qualifying Activities specified in paragraphs (a) to (m) of this Clause.
What is this de minimis rule?
The de minimis requirements shall be considered satisfied where the non-qualifying Revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed lower of:
- 5% of total revenue, OR
- AED 5 million
How can Digits help you?
Are you an organisation in the free zone? Do you want to know whether you can avail the benefits of a qualified free zone. Qualified free zone area is a complicated topic with can result in multiple repercussions if not handled properly. However, the Digits Audit team of corporate tax experts is here to guide and support you. Our comprehensive legal, compliance, and tax advisory services will help you smoothly implement the corporate tax in the UAE. We’ll even help you evaluate your business’s categorization and take care of any necessary registrations or applications. Call us today, and let us provide the perfect solution for your needs!
