Corporate tax in UAE

Free Zone:

A Free Zone is a business jurisdiction in UAE that is governed by the Free Zone Authorities. They have separate legislation and regulations. Free Zones in the UAE play a vital role in economic growth. There are more than 40 Free Zones in UAE.

The Free Zones support business investors with highly efficient infrastructure and business support services to seamlessly establish and operate a company in the UAE.VAT and Corporate Tax will be applicable in Free Zone and there will be exemptions if certain criteria is met by the Free Zone company.

Designated Zone:

A Designated Zone in UAE is a Free Trade Zone that is considered to be outside of UAE territory for VAT Purposes. So, supplies made from inside a designated zone are free of VAT. To gain the Designated Zone status the Free Zone must be fenced and must have a custom-check point.

Also, there are well-defined regulations for the movement of goods and individuals to and from the Free Zone.  Companies operating in a Designated Zones can get Corporate Tax exemption under specific criteria.  

Only income is generated from “Qualifying Activities” and not from Excluded Activities. Also, there is a ‘Demimis’ requirement in UAE.  Qualifying Free Zone Persons can be exempt from Corporate Tax if their non-qualifying income is less than 5 % of the total revenue or AED 5 Million, whichever is lesser.

A Qualifying Income is an income earned by a Free Zone Person by conducting Qualifying Activities and not excluded activities.  There are a few criteria to be met to determine the ‘Qualifying Income’.

A Qualifying Free Zone Person must meet the following criteria to determine the ‘Qualifying Income’.

• Income from transactions with other Free Zone persons. [ income must not be from excluded activities)
• Income from transactions with a Non-Free Zone Person but only for Qualifying activities and not excluded activities.
• De Minimis Requirement – If income from non-Qualifying Activities is less than 5 % of the Total Revenue or AED 5 million whichever is lesser.
• Income from transactions with a Free Zone person where that Free Zone person is the Beneficial Recipient of the goods or services.

Activities that are not listed under Qualifying Activities either fall under excluded activities or Non-qualifying activities. Income from such activities is subject to ‘De minimis’ requirements. That is, such income should be lower than 5% of the total revenue or AED 5 million or whichever is lower to remain as a Qualifying free zone person. Refer Article 4

Excluded activities are listed under Article 3 of Ministerial Decision 139. Excluded activities are part of Non-qualifying income. Non-qualifying activities are the activities where the other party to the transaction is a Non-qualifying free zone person. (For example, the distribution of goods is a qualifying activity but if done to a Non-qualifying free zone person, it becomes a Non-qualifying activity)

If the Free Zone Company is in a designated Free Zone and the goods are entering the Designated Free Zone in UAE, then it is treated as a ‘Qualified Activity’. Any trade done with a mainland company or other normal person will be subject to the standard 9% Corporate Tax if the annual revenue threshold of AED 375,000 or above is met.

So, the Free Zone Company doing Trading Business can get a Zero-Rated CT if the goods and services are sold to or between:

• Free Zone companies in Designated Zones
• Free Zone person is the beneficial Recipient (consumption of goods and services within the Free Zone and not sold to external parties)
• Import -Export from Designated Free Zone to international markets and goods not entering UAE. (High Sea sales)

Trading activities are done via a Designated Zone and if the goods are not touching UAE ports or entering inside of UAE, then the Free Zone Company based in the Designated Zone can avail of Zero-Rated Corporate Tax.

As per Article 3 (1) (a) of Cabinet Decision) income derived “from a free zone person” falls under zero-rated activities. Hence, services provided to a free zone person by a free zone person will be zero rated, provided income derived from services provided to a Non-free zone person falls under the De-minimis limit mentioned under Question no 3. 

No. As per Article 3 (1) (a) of Cabinet Decision) income derived “from a free zone person” only falls under zero-rated activities. (De-minimis limit can be considered for services provided to a Non-free zone person). Therefore services provided to a foreign person will be subject to UAE CT. 

Not zero-rated. As per Article 1 of Cabinet Decision 55 (definitions), a place of the presence of a qualified free zone person outside the free zone is treated as Domestic Permanent Establishment as per Article 4 (4) and subject to the provisions of Article 14 of Decree-law (Treated as a permanent establishment of a Non-resident person).

As per Article 3 (1) of the Cabinet Decision, income attributable to a Domestic Permanent Establishment (can be a branch or a related party) shall not be included in qualifying income. Article 3 (5) of Cabinet Decision 55 further clarifies this point. Hence income from a branch in the mainland is allowed only subject to the limit of De minimis explained under Question 3 above. 

The free zone entity is treated as a juridical person for UAE CT purposes. Therefore, will be eligible for a zero rate of tax on “Qualifying income” earned by the branch and also subject to the De Minimis limit under Article 4 of the Cabinet Decision. 

Apart from meeting the conditions set out in Cabinet Decision No 55 and Ministerial Decision no 139, a qualifying free zone must, 

1. Maintain adequate substance. 
2. Comply with Arm’s length principle and transfer pricing documentation and
3. Has not elected to be subject to corporate tax by choice. 
4. Its non-qualifying revenue does not exceed de minims limit. 
5. Prepare audited financial statements. 

(Refer to Article 18(1) of decree law and Article 5 (1) of Ministerial decision 139 of 2023.

1. A Qualifying Free Zone Person shall undertake its core income-generating activities in a Free Zone and, having regard to the level of the activities carried out, have adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures.
2. Activities can be outsourced to a Related Party in a Free Zone or a third party. In a Free Zone, provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity.

Refer to Article 7 of Cabinet Decision 55 of 2023. 

The qualifying free zone person shall cease to be a qualifying free zone person 

1. From the beginning of the relevant tax period and 
2. For the subsequent 4 tax periods. 

Refer to Article 5 (2) of Ministerial Decision 139 of 2023.