Businesses in the UAE have long enjoyed the benefit of zero corporate tax. This made the country a top choice for investors. But things have changed with the introduction of a 9% corporate tax in June 2023. Companies in Free Zones still have tax advantages, but there are new conditions. A lot of business owners are not sure if they qualify for tax exemptions or not. It’s important to be aware of the changes to stay compliant and avoid unexpected costs on the way. Tax Gian, has experts who can assist you in understanding your tax liabilities better and staying out of tax troubles.

New Corporate Tax Structure in UAE Free Zones

The corporate tax system now has two main categories:

• Businesses on the mainland must pay a 9% tax on income above AED 375,000.
• Companies in Free Zones can enjoy a 0% tax rate on qualifying income if they meet the conditions.
• Any non-qualifying income is taxed at 9%.

This means Free Zone companies must assess whether their income qualifies for the tax exemption.

Who Qualifies for the 0% Tax Rate in UAE Freezones?

Not every Free Zone business automatically gets the tax benefits. To qualify as a Qualifying Free Zone Person (QFZP), a company must:

• Have a physical presence in the UAE, including office space and employees.
• Earn most of its revenue from qualifying activities within the Free Zone or with international clients.
• Not opt for the standard corporate tax system.
• Ensure that non-qualifying income does not exceed 5% of total revenue or AED 5 million, whichever is lower.
• Maintain proper financial records audited under IFRS standards.
• Follow any additional Free Zone authority requirements.

Companies that fail to meet these conditions must pay the 9% tax on all their income.

Qualifying vs. Non-Qualifying Income

Qualifying income refers to revenue earned from specific business activities approved by the UAE government. These include:

• Manufacturing of goods or materials.
• Processing of goods or materials.
• Holding of shares and other securities.
• Ownership, management and operation of Ships.
• Reinsurance services that are subject to the regulatory.
• 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, including engines and rotable components.
• Distribution of goods or materials in or from a Designated Zone.
• Logistics services.

Non-qualifying income includes earnings from activities outside the Free Zone, dealings with mainland businesses, and some restricted sectors. Companies exceeding the non-qualifying income limit lose their tax benefits. Please note: The above conditions have to be met throughout the tax period and is not a one time requirement. If any of the conditions are not met the Taxable Person loses status of QFZP for the year in which they fail to meet conditions and subsequent 4 years.

CT Impact on Free Zone Companies

The new tax rules have different effects depending on the nature of the business:

1.  Companies Working Only Within Free Zones Businesses dealing only with other Free Zone entities can still enjoy the 0% tax rate, except for income from excluded activities
2.  Companies With Mainland Clients Businesses that earn revenue from UAE mainland companies may face taxation on those earnings. Any income from such transactions is considered non-qualifying and taxed at 9%.
3.  Mixed Revenue Companies If a company earns both qualifying and non-qualifying income, they need to monitor their revenue sources carefully. If non-qualifying income exceeds the allowed limit, the entire income may be taxed.
4. Freelancers and Small Businesses Freelancers and sole proprietors in Free Zones are not automatically exempt from tax. Their earnings are subject to corporate tax, just like mainland businesses.

Corporate Tax Compliance Requirements

To maintain eligibility for the 0% tax rate, Free Zone businesses must:

• Keep accurate financial records.
• Submit audited financial statements.
• Follow any new regulations from tax authorities.
• Regularly assess whether their income qualifies for tax exemptions.

What Businesses Should Do Next?

Business owners in Free Zones need to take action:

• Review Business Activities: Check if most revenue comes from qualifying activities.
• Determine Income Sources: Ensure that all non-qualifying income remains within the approved limit.
• Maintain Compliance: Make sure to maintain updated records on financial information audited periodically.
• Seek Professional Advice: Seek tax advisors like Tax Gian regarding the conditions a business should attain.

Choose the Best Tax Consultants, TaxGian!

The dynamics of Freezone business operations have changed to a great extent after the introduction of corporate tax in UAE. The tax-free advantages still prevail but under stern conditions. Tax Gian helps businesses that want to be aware of these changes timely, track their source of income, and remain in line to avoid tax surprises. Take our expert assistance and comply fully with tax laws.