How Does UAE Corporate Tax Impact Free Zone Companies in UAE? - Saif Chartered Accountants

UAE Corporate Tax Impact on Free Zone Companies

UAE Corporate Tax Impact : The implementation of Corporate Tax (CT) in the UAE through Federal Decree Law No. 47 of 2022 has significantly affected all businesses in the country.

This includes companies operating within the various Free Zones in the UAE, as they are now obligated to adhere to the UAE Corporate Tax regime. They must register for CT, maintain proper books of accounts under IFRS (mandatory for companies with annual turnovers exceeding AED 50 Million) or IFRS for SMEs (for companies with annual turnovers below AED 50 Million), and annually file their CT Return to the Federal Tax Authority (FTA). However, the overall impact of the UAE Corporate Tax on Free Zone Companies varies depending on the Free Zone of incorporation, business activities, and models.

The UAE boasts over 50 Free Zones, some of which offer Corporate Tax Holidays for companies engaged in Qualifying Business Activities for up to 50 years. However, certain Free Zones lack such provisions.

The Ministry of Finance (MOF) of the UAE has notified Free Zones with Corporate Tax Holiday provisions, making companies engaged in Qualifying Business Activities eligible for 0% UAE Corporate Tax Benefit under Cabinet Decision (CD) No.55 of 2023 and Ministerial Decision (MD) No.139 of 2023. Companies incorporated in Free Zones not notified by the MOF for the 0% Corporate Tax Benefit will not be considered Free Zone Persons (FZPs) for UAE Corporate Tax purposes and will be subject to the same provisions as Mainland Companies.

To become a Qualifying Free Zone Person (QFZP) under the UAE Corporate Tax Law, an FZP must meet additional conditions. These include maintaining adequate substance within the Notified Free Zone, deriving Qualifying Income as specified in CD No.55 and MD No.139, refraining from Excluded Activities, not electing to be subject to CT at Standard CT Rates, and maintaining Audited Financial Statements as per MD No.82 of 2023.

A QFZP subject to CT under Clause 2 of Article 3 will be subject to UAE CT at 0% on Qualifying Income and 9% on Taxable Income that is not Qualifying Income.

Qualifying Income includes income derived from transactions with other FZPs (excluding income from Excluded Activities) and transactions with non-FZPs related to Qualifying Activities not considered Excluded Activities. Non-Qualifying Income is derived from Excluded Activities or activities not considered Qualifying Activities as per CD No.55 and MD No.139.

Qualifying Activities comprise Manufacturing of Goods and Materials, Processing of Goods and Materials, Distributions of Goods or Materials in or from a Designated Zone, Ownership, Management, and Operation of Ships, Regulated Reinsurance Services, Regulated Wealth and Investment Management Services, Headquarter Services to Related Parties, Treasury and Financing Services to Related Parties, Regulated Fund Management Services, and Logistics Services.

Excluded Activities include transactions with natural persons, certain regulated financial services and activities (e.g., banking services), income from intangible assets, and income from commercial immovable property located outside of notified Free Zones and other immovable property located within or outside notified Free Zones.

Earning income from Excluded Activities or non-Qualifying Income exceeding the de minimis threshold will disqualify an FZP from eligibility for 0% UAE Corporate Tax.

Failure to meet the conditions outlined in CD No. 55 or MD No.139 will result in an FZP losing its QFZP status as per Article 18 of the CT Decree Law, effective from the beginning of the relevant Tax Period and continuing for the subsequent four Tax Periods.

Understanding UAE Corporate Tax for Qualifying Free Zone Companies (QFZP)

Income derived by QFZP From	Examples of customers	Non-Qualifying Income	Qualifying Income
Qualifying Activities from Non-FZ persons i.e. sales by QFZP to Non FZPs including Overseas Customers	• Mainland Entity • Foreign Entity • Non FZP	Income from activities that are ‘Not Qualifying Activities’	Income from ‘Qualifying Activities’ Subject to de minimis requirements
Not Excluded Activities from Other FZPs i.e. sale by QFZP to Other FZPs	Other FZP’s in same Free Zone or Other Free Zones	Income from ‘Excluded Activities’	Income from ‘Non Excluded Activities’ Subject to de minimis requirements