The United Arab Emirates (UAE) has been known as a hub for business and trade, with its strategic location, world-class infrastructure, and business-friendly policies. One of the key drivers of the country’s economic growth has been its free zones, which have attracted businesses from across the globe to set up operations in the country.
Key Advantage of Setting Up a Business in Freezone
A key advantage of setting up a business in a UAE free zone is the ease of doing business. The process of setting up a business in a free zone is straightforward and can be completed quickly, with many free zones offering online portals to register a business. Additionally, free zones offer companies access to modern infrastructure, including state-of-the-art technology, logistics and transportation services.
However, recently there has been a significant change in the tax landscape of the UAE, with the introduction of the Federal Decree Law No. 47 of 2022 on the Taxation of Corporation and Businesses (Corporate Tax Law).
This has raised concerns among free zone companies in the UAE, as they have been exempted from tax until now. However, the Free Zone entities will still be exempt from corporate tax, if they are considered to be Qualified Free Zone Person and generating “Qualifying Income”.
Do Qualifying Free Zones Businesses in the UAE will be subject to Corporate Tax ?
Qualifying Free Zones Businesses in the UAE will be subject to Corporate Tax only if they are generating income, which is not Qualifying Income as specified in any subsequent decision issued by the Cabinet at the suggestion of the Minister. If a Free Zone Person is not a Qualifying Free Zone Person or cease to be a Qualifying Free Zone Person at any time during a Relevant Financial Year, “Total Income” earned by such free zone Person will be subject to UAE CT at a rate of 9%. It is important to note that the exemption up to AED 375,000 will not be available to such free zone businesses.
However, in accordance with article 19 of Federal Decree Law No. 47 of 2022, a Qualified Free Zone business may elect to be subject to Corporate Tax rates specified under Clause 1 of Article 3 of Federal Decree-Law No. 47 of 2022. If any Qualified Free Zone Business exercises the right conferred by article 19, then they will be allowed to enjoy benefit of 0% Corporate Tax up to Income of AED 375,000.
As the UAE prepares to implement the OECD’s Pillar Two rules, there may be changes to the treatment of qualifying free zone businesses that are part of large multinational groups. While these entities are currently exempt from UAE Corporate Tax, it is expected that they may be subject to a different rate of corporate tax once the Pillar Two rules are embedded into the UAE CT regime.
This could mean that qualifying free zone businesses that are part of large multinational groups may no longer be exempt from corporate tax in the UAE. However, it is important to note that the specific rate of corporate tax that may apply to these entities has not yet been determined.
The introduction of corporate tax in the UAE is expected to have a significant impact on free zone companies. Though, they might be exempt from paying Corporate Tax but they will still need to review their tax structures and ensure compliance with the new regulations. Qualifying Free Zone Businesses are only exempt from paying tax, but not from registering themselves for UAE CT, filing Tax returns and other regulatory compliances.
The UAE has established more than 45 free zones across the country, offering a range of incentives and benefits to foreign companies looking to set up operations in the region. Either its 100% foreign ownership or about exemption from corporate tax, UAE Free Zones has a lot to offer.
