The United Arab Emirates (UAE) recently implemented Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, which took effect on June 1, 2023. Under this law, most taxpayers are subject to a 9% tax rate on their taxable profits. However, companies operating in free zones are subject to different tax rates based on their income and meeting specific conditions.
Tax Rates
A Qualifying Free Zone Person will be taxed at the following rates:
- 0% on Qualifying Income
- 9% on Taxable Income that is not Qualifying Income
Qualifying Free Zone Person (QFZP)
To be considered a QFZP, a Free Zone Person must fulfil the following requirements:
- Maintains adequate substance in the UAE
- Generate Qualifying Income
- Has not elected to be subject to Corporate Tax under Article 19
- Complies with transfer pricing requirements
- Ensure that non-qualifying revenue does not exceed the de-minimis requirements
- Prepares audited financial statements
- Meet any other conditions specified by the UAE Minister in subsequent decisions
To provide further clarity on qualifying and non-qualifying income, the UAE has recently introduced Ministerial Decision No. 139 of 2023 Regarding Qualifying Activities and Excluded Activities & Cabinet Decision No. 55 of 2023 on Determining Qualifying Income for the QFZP.
Qualifying Income
Qualifying Income of a QFZP includes the following categories, provided they are not attributable to a Domestic or Foreign Permanent Establishment or the ownership or exploitation of immovable property:
- Except for the income derived from excluded activities, all the income derived from transactions with other Free Zone Persons.
- Any income generated through qualifying activities, whether derived from a Free Zone Person or Non-Free Zone Person.
- Any other income, where QFZP satisfies the “De Minimis” requirements.
De Minimis Requirements - Corporate Tax Applicability on Freezone Companies
If a QFZP earns revenue in a tax period that is typically considered non-qualifying, but it meets the de minimis requirements outlined below, it will be classified as qualifying income according to Point – iii under the head “Qualifying Income.” This exception allows non-qualifying income to be treated as qualifying income.
- Non-Qualifying income is not exceeding 5% of the total Revenue; or
Non-Qualifying income is up to AED 5,000,000.
Whichever is lower.
Non-Qualifying Revenue
Non-qualifying Revenue is Revenue derived in a Tax Period from any of the following activities:
- Excluded Activities.
- Activities that are not Qualifying Activities where the other party to the transaction is a Non-Free Zone Person.
Revenue which will not be a part of Non-Qualifying Revenue and Total Revenue
Certain revenue sources are excluded from the calculation of non-qualifying revenue and total revenue, and they are subject to a tax rate of 9%. These include:
- Revenue generated from immovable property located in a Free Zone, where:
- transactions involving commercial property with Non-Free Zone Persons
- transactions with any person involving immovable property that is not categorized as commercial property.
- Revenue attributable to either a Domestic Permanent Establishment or a Foreign Permanent Establishment of the Qualifying Free Zone Person.
Corporate Tax Applicability on Freezone Companies -Illustration
Particulars | AED |
Taxable Income derived through Qualifying Activities (a) | 5,000,000 |
Taxable Income derived from activities which are non-qualifying (b) | 250,000 |
Taxable Income derived from non-excluded activities from transactions with other FZPs (c) | 750,000 |
|
|
Total Revenue (a+b+c) | 6,000,000 |
|
|
Taxable income attributable to Immovable Property as specified above | 800,000 |
Taxable Income attributable to Domestic / Foreign PE | 200,000 |
|
|
Tax on Total Revenue at 0% | – |
Tax on Income attributable to Immovable Property at 9% | 72,000 |
Tax on Income attributable to Domestic / Foreign PE at 9% | 18,000 |
|
|
Total Tax Liability | 90,000 |
How RVG can help?
With in-depth knowledge and experience, RVG can offer expert guidance on tax planning, ensuring clients optimize their tax positions while complying with all legal requirements. We can assist in determining the eligibility of clients as Qualifying Free Zone Persons (QFZPs), identifying qualifying and non-qualifying income, and structuring transactions to achieve favorable tax outcomes. RVG can also handle tax compliance matters, including record-keeping, preparation of financial statements, and timely submission of tax returns. With RVG’s expertise, clients can navigate the complexities of UAE corporate tax laws with confidence, knowing they have a trusted partner to guide them every step of the way. For Free Feezone Corproate Tax Assessment , Click Here
