Businessmen and investors in the UAE usually find it complicated to comprehend how corporate tax works for Free Zone Persons. Due to varying tax rates and conditions, most companies are not sure if they are eligible for tax relief or have to pay the standard tax rate. Misinterpretation of these regulations can result in expensive errors, unforeseen tax bills, and lost tax exemptions. Here, we simplify who a Free Zone Person in UAE is, clarify who can avail of tax relief, and describe the essential compliance rules under UAE Corporate Tax Law.
Tax Gian, a brand of Jitendra Tax Consultants, helps companies in the UAE understand their tax liabilities comprehensively and comply with tax laws properly.
Who is a Free Zone Person?
A Free Zone Person is a legal entity that is incorporated, registered, or established in a designated Free Zone within the UAE. This includes Free Zone authorities and government-controlled entities in these areas. Businesses with branches in Free Zones, whether resident or non-resident, may also qualify as Free Zone Persons. However, natural persons and unincorporated partnerships do not fall under this category.
What is a Free Zone for Corporate Tax Purposes?
A Free Zone is a designated geographic area within the UAE recognised by the government for specific tax benefits. These zones are defined in decisions issued by the Cabinet and align with federal laws, such as VAT regulations. Businesses must confirm with their respective Free Zone Authority to determine whether they operate in an eligible Free Zone.
Tax Benefits for Free Zone Persons in UAE
The UAE Corporate Tax Law allows a 0% corporate tax rate on qualifying income for Free Zone Persons classified as Qualifying Free Zone Persons. Any income that does not meet the criteria for Qualifying Income is subject to the standard 9% corporate tax rate.
Qualifying Free Zone Person: Conditions to Meet
To benefit from the 0% corporate tax rate, a Free Zone Person must meet the following conditions:
- Maintain a sufficient business presence in a Free Zone.
- Earn Qualifying Income.
- Not elect to be taxed under the standard corporate tax rate.
- Follow the arm’s length principlefor transactions with related parties.
- Maintain transfer pricing documentation and audited financial statements.
- Ensure that non-qualifying revenue does not exceed AED 5 million or 5% of total revenue.
If any of these conditions are not met, the business must pay the standard 9% corporate tax rate on its entire taxable income.
Excluded Activities and Their Tax Implications
Some activities are not eligible for the 0% corporate tax rate, even if carried out in a Free Zone. These include:
- Banking activities
- Insurance (except reinsurance and captive insurance for related parties)
- Financial and leasing activities, except for specific ship and aircraft-related transactions
- Real estate ownership and operations outside of transactions with other Free Zone Persons
If a business primarily engages in these activities, it will be taxed at the standard 9% rate.
Compliance Requirements for Free Zone Persons
All Free Zone Persons, including Qualifying Free Zone Persons, must adhere to the following tax obligations:
- Tax Registration:Businesses must register for corporate tax with the Federal Tax Authority (FTA) within the prescribed timeline.
- Audited Financial Statements:Businesses must prepare and maintain audited financial statements, even if revenue is below AED 50 million.
- Tax Returns and Payments:Businesses must submit tax returns and pay any applicable corporate tax within nine months after the end of the tax period.
- Record Keeping:Companies must maintain records and documents for at least seven years to comply with tax laws.
Losing Qualifying Free Zone Person Status
A Free Zone Person may lose its tax benefits if:
- It fails to meet any of the conditions required to remain a Qualifying Free Zone Person.
- It voluntarily elects to be taxed under the standard corporate tax rate.
In such cases, the company will be subject to the 9% tax rate from the beginning of the relevant tax period.
Why Choose Tax Gian?
It is critical to understand whether or not a company is a Free Zone Person and is eligible for tax benefits and compliance. Our expert tax services ensure your company’s compliance with UAE corporate tax legislation, which guarantees that companies can reap maximum tax benefits without facing penalties. We keep our clients updated with the latest regulations and amendments in legislation for better compliance and performance.
