Corporate Tax
Corporate Tax is a form of direct tax levied on the net income of corporations and other businesses. Corporate Tax is sometimes also referred to as “Corporate Income Tax” or “Business Profits Tax” in other jurisdictions.
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.
About Corporate Tax
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.
Tax rates for Free Zones
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.
Who all are qualified as Free Zone Persons?
Every person who is conducting business in a Free Zone is automatically a Free Zone person. However, in order to be a qualified Free Zone Person, all the conditions below must be met. Even if one condition is not met, then the Free Zone Person will not qualify Free Zone Person.
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The entity must have and maintain sufficient substance in the UAE. This means he is carrying out business activities in the jurisdiction of the UAE instead of only registering for tax-related reasons.
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He is earning “Qualifying Income” that will be specified by the Cabinet Decision.
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He complies with transfer pricing rules and is maintaining the related transfer pricing documentation.
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He has not elected to pay the corporate tax in full.
UAE Ministerial Decisions Release
The highly anticipated Decisions on the Corporate Tax Rules for Free Zones have recently been released.
Cabinet Decision No 55 of 2023 was issued on 30 May 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (hereinafter referred to as the “CT Law”).
Moreover, the Ministry of Finance issued on 1 June 2023 the Ministerial Decision No. 139 of 2023 regarding Qualifying Activities and Excluded Activities the Purposes of the the CT Law. This Decision should be read in conjunction with Cabinet Decision No 55 of 2023 to obtain a full understanding of the proposed rules.
Key highlights
The UAE CT Law states that a Qualifying Free Zone Person (“QFZP”) will be taxed at the following rates:
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0% (zero percent) on Qualifying Income.
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9% (nine percent) on Taxable Income that is not Qualifying Income.
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One of the most awaited topics was the definition of “Qualifying Income” which has now been clarified to include:
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Income derived from transactions with other Free Zone Persons, except for income derived from “Excluded Activities”.
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Income derived from transactions with a Non-Free Zone Person, but only in respect of "Qualifying Activities" that are not Excluded Activities.
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Any other income provided that the QFZP satisfies the de minimis requirements.
When can a Free Zone Person be a Qualifying Free Zone Person?
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:
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Maintain adequate substance in the UAE;
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Derive ‘Qualifying Income’;
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Not have made an election to be subject to Corporate Tax at the standard rates;
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Comply with the transfer pricing requirements under the Corporate Tax Law.
Break Down of Corporate Tax
FTA ANNOUNCED DEADLINE FOR REGISTRATION
LATE REGISTRATION PENALTY AED 10,000
Timeline for the Tax Registration of Resident Juridical Persons
The Timeline specified for Registration of Taxable Persons for Corporate Tax for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses and its amendments
Federal Tax Authority Decision No. 3 of 2024 – Issued 22 February 2024 (Effective 1 March 2024)
1. A juridical person that is a Resident Person, incorporated or otherwise established or recognized prior to the effective date of this Decision, shall submit the Tax Registration application, in accordance with the following table:
2. For the purposes of Clause 1 of this Article, where a juridical person has more than one Licence, the Licence with the earliest issuance date shall be used.
3. A juridical person that is a Resident Person incorporated or otherwise established or recognised on or after the effective date of this Decision, shall submit a Tax Registration application, in accordance with the following table:
Timeline for the Tax Registration of Non-Resident Juridical Persons
1. A juridical person, that is a Non-Resident Person prior to the effective date of this Decision, shall submit a Tax Registration application in accordance with the following table:
2. A juridical person, that is a Non-Resident Person on or after the effective date of this Decision, shall submit a Tax Registration application in accordance with the following table:
Timeline for Tax Registration of Natural Persons
A natural person conducting a Business or Business Activity in the State shall submit a Tax Registration application in accordance with the following table:
Late Registration for Corporate Tax
Where Persons referred to in Articles 3, 4 and 5 of this Decision fail to submit a Tax Registration application as per the timelines stated above, Administrative Penalties shall be applied in accordance with Cabinet Decision No. 75 of 2023 referred to above.
Abrogation of Conflicting Provisions
All provisions contrary to or inconsistent with the provisions of this Decision shall be abrogated.
Publication and Application of this Decision
This Decision shall be published in the Official Gazette and shall come into effect as of 1 March 2024.
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