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Corporate tax exemption for free zone companies in UAE: What you need to know
The webinar organised by Farahat & Co. Corporate Tax team provided participants with a comprehensive understanding of the impact of the UAE's corporate tax law on free zone companies
The recent implementation of the UAE's corporate tax law, Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, has brought about significant changes in the taxation landscape for free zone companies. To address the concerns and provide clarity on the new regulations, Farahat & Co. Corporate Tax team organised a comprehensive webinar that explored the implications of the law and discussed the specific conditions for free zone companies to qualify for a zero per cent corporate tax rate.
During the webinar, the experts delved into the key points of the UAE's corporate tax law. They highlighted the shift in the taxation landscape for free zone companies, emphasising that free zone entities are required to register under the corporate tax regime and abide by its provisions. However, they also discussed the possibility for free zone companies to qualify for a zero per cent corporate tax rate if specific conditions outlined in the law are met. This change aims to establish a more equitable tax system, ensuring consistency between free zone and mainland licensing authority companies in the UAE.
Free Zone Person, as defined in Article 1 of the law, includes juridical entities incorporated, established, or registered within a Free Zone, along with branches of Non-Resident Persons registered in a Free Zone. Additionally, they elaborated on the concept of 'Qualifying Free Zone Person' outlined in Article 18, emphasizing the specific conditions that must be met to secure the exemption and enjoy the favorable tax rate. According to Article 18, a person operating within a free zone in the UAE must meet the following conditions to maintain their qualifying status:
- They must have sufficient substance in the UAE.
- They must generate qualifying income as defined in the cabinet decision.
- They must comply with the prevailing transfer pricing rules and regulations.
- They must not have chosen to be subject to corporate tax.
Failure to meet any of these four conditions will result in the person losing their status as a qualifying free zone person.
By incorporating these definitions, the Corporate Tax UAE Law clarifies the entities that fall within the scope of Free Zone taxation. The conditions specified in the law serve as the criteria for determining which Free Zone Persons are considered Qualifying Free Zone Persons and thus subject to Corporate Tax.
Article 3 of the Corporate Tax Law, which stipulates the following tax rates that apply to Qualifying Free Zone Persons:
a) Zero per cent on qualifying income: Qualifying Free Zone Persons are entitled to a corporate tax rate of zero per cent on their qualifying income.
b) Nine per cent on Taxable Income that does not qualify under Article 18: Taxable Income generated by Qualifying Free Zone Persons, which does not meet the conditions outlined in Article 18, is subject to a corporate tax rate of nine per cent. This rate applies to income that falls outside the scope of the qualifying criteria or any specific exemptions defined in the Corporate Tax Law and relevant Cabinet decisions.
By providing this information, the experts enabled participants to understand the potential tax implications for their businesses.
Understanding Qualifying Income and Excluded Activities
During the webinar, the experts shed light on the crucial concept of Qualifying Income and its significance for free zone companies. They discussed Article 3 of the Cabinet Decision No. 55 of 2023, which says 'qualifying income' comprises the following:
- Income derived from transactions with other free zone Persons, excluding income from 'excluded activities'.
- Income derived from transactions with any person, both domestic and foreign, in the case of "qualifying activities," excluding income from excluded activities.
The experts further elaborated on the concept of excluded activities, highlighting those certain activities, known as excluded activities, are not considered qualifying income. These excluded activities include transactions with natural persons, regulated banking, insurance, financing, specific leasing activities, ownership or use of intellectual property assets, and ownership or use of UAE immovable property.
If a free zone company earns income from excluded activities or generates any other income that does not fall under the category of qualifying income, it will lead to the disqualification of the company from the corporate tax regime. However, this disqualification is subject to the fulfilment of de minimis requirements.
The experts also explained the de-minimis requirement. According to the experts, in certain cases, a qualifying free zone entity may earn a small or incidental amount of non-qualifying income without being subject to corporate tax. The de-minimis threshold should not exceed the lower of Dh5 million or five per cent of total revenues. The term de-minimis refers to amounts considered small or marginal in tax terminology.
The webinar participants received valuable insights into the essential conditions for free zone companies to avail themselves of the zero percent corporate tax rate. The experts discussed the significant decisions issued by the Ministry of Finance, including Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023. They emphasized the followings essential conditions:
- Companies operating within free zones have the advantage of enjoying a zero per cent tax rate on income generated from specific qualifying activities and transaction.
- The tax benefit applies to qualifying companies incorporated, established, or registered in a free zone.
- Qualifying activities encompass various sectors such as manufacturing, reinsurance services, holding shares and other securities, owning, managing, and operating ships, and fund, wealth, and investment management services under the regulatory oversight of the United Arab Emirates (UAE). Additionally, treasury and financing services, financing and leasing of aircraft (including engines and rotable components), and logistics services are considered qualifying activities.
- If a free zone company earns income from excluded activities or non-qualifying sources, it will lose tax benefits unless it meets the de minimis requirements.
- If the requirements mentioned above are not met, the free zone entity will not be eligible for the benefits of the free zone corporate tax regime for a minimum period of five years.
- To determine whether their free zone is eligible for the zero per cent tax rate, businesses can contact Farahat & Co. These platforms offer specialized assistance and comprehensive information pertaining to corporate tax matters in the UAE.
In conclusion, the webinar organised by Farahat & Co. Corporate Tax team provided participants with a comprehensive understanding of the impact of the UAE's corporate tax law on free zone companies. The experts explored the specific conditions for qualifying for a zero per cent corporate tax rate and discussed the implications of the law and relevant decisions. By participating in this webinar, attendees gained valuable insights to navigate corporate taxation in free zones effectively and optimise their financial strategies.
Farahat & Co. Corporate Tax team continues to provide expert guidance and support to free zone businesses seeking to comply with the new corporate tax regulations. The webinar served as a testament to their commitment to empowering businesses with knowledge and enabling them to make informed decisions in a changing tax landscape.
Visit https://farahatco.com/services/corporate-tax-uae/ and https://corporatetaxuae.com/.
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