The UAE is always working to improve its business environment, and the latest changes in the Corporate Tax rules for free zone businesses are a big step in that direction. If you run a business in one of the UAE’s free zones, it’s important to understand these new rules so you can take full advantage of the tax benefits. This blog will break down the latest updates on qualifying free zone persons, making it easy to see how your business can benefit and what you need to do to stay compliant.

Let’s explore what these changes mean for you:

Latest Update on Qualifying Free Zone Persons in the UAE

The UAE Ministry of Finance has recently introduced two key decisions shaping the Corporate Tax regime for juridical persons operating in the country’s free zones. These decisions are Cabinet Decision No. 55 of 2023 on Determining Qualifying Income and Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities. This update provides a clear outline of how businesses in free zones will be taxed and the types of activities that qualify for tax benefits.

Key Announcements

At a press conference held today, His Excellency Younis Haji Al-Khoori, Undersecretary of the Ministry of Finance, emphasized the significant role of Corporate Tax in bolstering the UAE’s financial and economic sectors. He also thanked the media for their efforts in spreading awareness about Corporate Tax.

Free Zone Corporate Tax Regime

The new Corporate Tax regime targets “Free Zone Persons,” defined as juridical persons incorporated, formed, or registered within a Free Zone. This regime is designed to apply only within these specified Free Zones. Businesses can contact their Free Zone Authority to verify eligibility for the 0% tax rate. This rate applies exclusively to income from activities conducted within or from the Free Zone.

Qualifying Activities

Ministerial Decision No. 139 of 2023 outlines activities that are considered “Qualifying Activities,” allowing businesses to benefit from the tax-free regime. These activities include:

  • Manufacturing and processing of goods or materials
  • Holding and trading of shares and securities
  • Ownership, management, and operation of ships
  • Regulated reinsurance services
  • Fund management services under UAE regulatory oversight
  • Wealth and investment management services under UAE regulatory oversight
  • Provision of centralized management services to related parties
  • Treasury and financing services to related parties
  • Financing and leasing of aircraft
  • Logistics services
  • Distribution from a designated zone

These activities ensure that income derived from them is treated as “Qualifying Income” and is eligible for the 0% tax rate.

Excluded Activities

Certain activities are excluded from benefiting from the Free Zone Corporate Tax regime as per Cabinet Decision No. 55 of 2023. These “Excluded Activities” include:

  • Transactions with natural persons, except those related to Qualifying Activities
  • Banking, insurance, finance, and leasing activities under UAE regulatory oversight
  • Ownership or exploitation of immovable property, except commercial property transactions within the Free Zone
  • Ownership or exploitation of intellectual property assets

Any income derived from these Excluded Activities will disqualify a business from the Free Zone Corporate Tax regime, subject to certain conditions.

Revenue Threshold and Compliance

To maintain the Free Zone Corporate Tax benefits, non-qualifying revenue must not exceed the lower of 5% of the total revenue or AED 5,000,000. If these conditions are not met, the business will lose its Qualifying Free Zone Person status and be subject to a 9% Corporate Tax rate for a minimum of five years.

Conditions for Qualifying Free Zone Persons

To benefit from the 0% tax rate, a Qualifying Free Zone Person must:

  • Maintain adequate substance within the UAE
  • Derive income from Qualifying Activities
  • Prepare and maintain audited financial statements

If a business fails to meet these conditions, it will lose its Qualifying status for the relevant tax period and the next four tax periods.

Summary

The UAE’s new Corporate Tax regime provides clear guidelines for businesses operating in free zones. By focusing on Qualifying Activities and maintaining compliance with the outlined conditions, these businesses can enjoy significant tax benefits. However, it is crucial for them to regularly review their activities and income sources to ensure they remain within the qualifying criteria. For detailed guidance, businesses should consult our Tax & Accounting Department.

If you’re looking to set up a business in the UAE without facing any tax-related issues, Smart Zone is here to help. Contact Smart Zone today for expert guidance and seamless Business Setup in the UAE.