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Free zones in the UAE: how free are they from taxes today?

As the corporate tax regime evolves, it’s essential for businesses to stay compliant

The UAE has long been a prime destination for businesses seeking strategic advantages, with its extensive network of over 50 free zones offering substantial benefits. These free zones, both designated and non-designated, have historically provided businesses with attractive incentives, including tax holidays and customs duty exemptions, making them highly competitive in the global market.

Traditionally, businesses in UAE free zones enjoyed tax holidays ranging from 15 to 50 years, allowing them to operate without the burden of corporate taxes. In addition, many free zones offered exemptions from customs duties, though the specifics of these exemptions varied. Other key benefits included 100 per cent foreign ownership, full repatriation of capital and profits, strategic geographic connectivity, a streamlined registration process, and no currency restrictions.

However, the introduction of Federal Decree-Law No. (47) of 2022 on December 9, 2022 marked a significant change for businesses operating in the UAE. This corporate tax (CT) law, which applies to all taxable persons for financial years starting on or after 1 June 2023, introduced corporate tax across the board, including for businesses in free zones. While this marked the end of total tax exemptions for free zones, preferential tax rates are still available for certain entities.

To maintain these preferential tax benefits, free zone entities must now meet specific criteria to qualify for qualifying free zone person (QFZP) status. To do so, they must demonstrate sufficient economic substance within the free zone, derive qualifying income, adhere to transfer pricing rules, and maintain audited financial statements. In addition, their non-qualifying revenue must remain below the de minimis threshold set by law. Qualifying income for a QFZP stems from specific activities. For instance, businesses selling goods or services to other free zone entities — except for those listed as “excluded” under the law — can continue to benefit from a zero per cent corporate tax rate on the income generated. Additionally, free zone businesses can still enjoy a zero per cent tax rate on income from transactions with non-free zone entities, provided the income arises from qualifying activities. These include manufacturing, trading of qualifying commodities, investment holding, ship management, and certain financial and logistical services.

Once an entity secures QFZP status, it will be subject to a zero per cent tax rate on qualifying income and a nine per cent tax rate on non-qualifying income. Regardless of their status, all entities, whether qualifying or non-qualifying, must register for corporate tax and comply with mandatory return filing requirements.

In conclusion, while the UAE’s free zones no longer offer complete immunity from corporate taxes, they continue to provide significant benefits for businesses, including preferential tax rates, customs exemptions, and operational advantages. By meeting the conditions for QFZP status, businesses can still take advantage of a zero per cent corporate tax rate on qualifying income. As the corporate tax regime evolves, it’s essential for businesses to stay compliant with the new regulations while leveraging the many opportunities that free zones continue to offer.

The writer is partner, MICS International