Free Zone Persons – Introduction
The Federal Tax Authority (FTA) has recently released a guide outlining the conditions and procedures for applying corporate tax to free zone persons.
This guide aligns with the free zone tax regime, emphasizing the critical role free zones play in driving the state’s economic growth and transformation both locally and globally.
Benefits of Free Zones
Free zones offer numerous advantages for businesses, including fewer restrictions on foreign ownership, simplified administrative procedures, modern and advanced infrastructure, and additional types of legal entities and commercial activities.
These benefits make free zones an attractive option for businesses looking to operate within the state.
Qualifying for 0% Corporate Tax Rate
The guide details the conditions that a free zone person must fulfill to be classified as a qualifying free zone person and benefit from a 0% corporate tax rate on qualifying income.
If these conditions are not met or cease to be met during any relevant tax period as prescribed by the FTA, the defaulting entity will lose its qualifying free zone status.
Consequently, it will not benefit from the 0% corporate tax rate from the beginning of the tax period in which the conditions were not fulfilled, continuing for the following four tax periods.
Income Treatment and Compliance Requirements
The guide also clarifies the treatment of income generated from immovable property and qualifying intellectual property, as well as tax compliance requirements.
It specifies the qualifying and excluded activities for a qualifying free zone person, as outlined in Ministerial Decision No. 265 of 2023 regarding Qualifying Activities and Excluded Activities for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
Examples
To aid understanding, the guide provides examples illustrating the application of the corporate tax law to free zone persons.
It outlines how corporate tax is calculated for free zone persons, determining the qualifying income subject to the 0% tax rate and the income subject to a 9% tax rate.
Additionally, it includes conditions for maintaining an actual and sufficient presence in the free zones and the criteria for determining a local or foreign permanent establishment.
Permanent Establishments
The FTA guide also states that when a qualifying free zone person operates through a permanent establishment in the UAE but outside the free zones or in a foreign country, the profits of such permanent establishments will be subject to a corporate tax rate of 9%.
Conclusion
The new FTA guide provides essential information for businesses operating in free zones, ensuring they understand the conditions required to benefit from the 0% corporate tax rate and the implications of not meeting these conditions.
Final thoughts
If you have any queries about this article on Free Zone Persons, or UAE tax matters more generally, then please get in touch.