UAE Free Zones tax is not 100% clear. Whether Free Zones will be subject to corporate tax depends on the activity that the free zone deploys and the location of their clients, together with a look into the level of substantiation that the Free Zone can commit to.

This article explores and explains the key concepts introduced by UAE Federal Decree Law No. 47 of 2022 on corporations and business taxation together with Cabinet Decision No. 55 of 2023 on qualifying income for the qualifying free zone person and Ministerial Decision No. 139 of 2023 on qualifying activites and excluded activities.

Upon addressing the key concepts our publication jumps to addressing examples and answering the scenarios that a free zone entity could be facing under the light of the above regulation.

Free Zone companies can enjoy a zero per cent tax on income if they carry ‘qualifying activities’, satisfy the ‘de-minis requirements’, stick to regulations on ‘transfer pricing’, maintain adequate substance in the UAE and prepare financial statements.

Now we jump to the concepts before returning to conclusions.

What is qualifying income?

Qualifying Income is addressed in Ministerial Decision NO. 139 of 2023 and is defined as income from transactions with other free zones and non-free person which is not excluded activities.

What are qualifying activities?

They are addressed in Cabinet Decision No. 55 of 2023:

  • Manufacturing and processing of goods or materials;
  • Holding of shares or securities
  • Ownership, management and ships’ operations
  • Reinsurance and fund management services
  • Wealth and Investment management services
  • Headquarter services to related parties
  • Treasury and financing services to related parties
  • Financing and leasing of aircraft
  • Distribution of goods and materials to a customer than resells
  • Logistics services
  • Any ancillary activity to above

All free zones that undertake the above, irrespective to whom they provide the services their income will enjoy a 0% tax rate.

What are excluded Activities?

  • Transactions with natural persons
  • Banking activities
  • Insurance activites
  • Finance and leasing activities
  • Ownership or exploitation of immovable property other than commercial property located in a free zone where transaction taking place
  • Ownership of exploitation of intellectual property assets

Excluded activities will be taxed at 9%.

What are the de minimis requirements and how does it impact the UAE Free Zones Tax?

This figure allows non-qualifying revenue from ‘excluded activities’ and from activities not included in the qualified activities list with non-free zone person insofar as the qualifying revenue in a tax period does not exceed 5% of the total revenue of the entity or AED 5,000,000 whichever is lower.

What does complying with the Arm’s length principle and transfer pricing documentation mean?

This means that the pricing given to a transaction between related parties is similar to a comparable transaction between unrelated parties.

Which transactions receive a 0% rate? Expanding the earlier concept of Qualified Income.

A Free Zone is not to pay tax on income from:

  • Transactions with other free zones except if practicing ‘excluded activities’.
  • Transactions with a non-free zone person with respect to ‘qualifying activities’
  • Any other income if the de minimis requirements are satisfied.

Exceptions to the above are:

  • Income deriving from UAE mainland or PE (foreign permanent establishment) of the free zone company;
  • Income from ownership/exploitation of real estate in a free zone.

Important to stress:

  • First AED 375,000 revenue is not subject to tax. A company making AED 1 million in a given year will be taxed on AED 625,000.
  • Free Zones must audit their accounting annually.
  • Small business deriving revenue below AED 3 million could be treated as not having processed taxable income.

Conclusion – UAE Free Zones Tax

Free Zone entities need to comply with the below in order to be considered a qualifying Free Zone:

  • Obtain qualifying income
  • Not opt to be made subject to corporate tax
  • Comply with the arm’s length and transfer pricing regulations
  • Not obtain non-qualifying income in excess of the de minimis rule
  • Organize audited accounts annually
  • Maintain adequate substance within the Free Zone including assets and employees with aligned expenditure.

We trust that the above is of assistance when evaluating the upcoming UAE Corporate Tax. This important is of importance when selecting a international jurisdiction and also to organise the corporate affairs moving forward. For more information about UAE law  you can visit all our publications in this link as well as the videos of our director Maria Rubert.

**This publication is not intended as legal advice and rather as general information for practical awareness on the topic. This is a matter that has changed significantly since its announcement and has not yet been implemented.