Everything you need to know about corporate taxation as a free zone company

Corporate tax, which was announced last year and came into effect on June 1st 2023, will play a pivotal role in further enhancing the UAE's status as a top global business destination. As the UAE continues to evolve and diversify its economy, implementing corporate tax signifies an important step forward. It not only accelerates the nation's development and strategic objectives but also demonstrates the UAE's commitment to complying with global tax standards, promoting transparency, and eliminating harmful tax practices. Moreover, corporate tax will play an instrumental role in reducing the UAE's reliance on oil revenue, a crucial move towards economic sustainability. The UAE's corporate tax rate of 9% remains one of the lowest in the world, retaining its position as an attractive business destination.

Free Zone Companies in the UAE and Corporate Tax:

Questions have arisen regarding corporate tax impacting companies operating in the UAE's free zones that were 100% tax-exempt. It's essential to understand that companies engaged in qualifying (tax-exempt) activities in free zones may still pay zero per cent tax on income derived from specific qualifying (tax-exempt) activities and transactions.

A qualifying company can benefit from a zero percent corporate tax rate on qualifying income as long as it's incorporated, established, or registered in a free zone. Additionally, it can enjoy certain tax exemptions on income earned from transactions with mainland UAE businesses or foreign jurisdictions. On the other hand, free zone companies engaged in excluded activities will still be paying corporate tax on that portion of their income.

Qualifying or tax-exempt activities

Several activities fall under the purview of qualifying income, including fund, wealth, and investment management services, the manufacture and processing of goods or materials, reinsurance services, holding shares and other securities, as well as the ownership, management, and operation of ships. Moreover, services provided by headquarters to related parties, treasury and financing services to related parties, financing and leasing of aircraft, logistics services, and distributions in or from a designated zone that meet the relevant conditions are also considered qualifying activities.

The new corporate tax levy is strategically designed to further enhance the country's attractiveness in vital sectors, encouraging economic diversification and foreign investment.

However, it's important to note that earning income from excluded activities or any other income that doesn't qualify will result in the free zone company being disqualified from tax exemption. This disqualification is subject to "de minimis requirements," which allow a qualifying free zone entity to earn a small amount, up to AED 5 million or 5% of total revenue, of non-qualifying income without losing its eligibility for the corporate tax regime.

Depending on the size and activities of a free zone company, a portion or the entirety of its income could be taxable under the new taxation framework. It's crucial for businesses to assess their activities and income sources to determine their tax liability accurately to be compliant with the new laws.

Conclusion:

Understanding how the new tax regime impacts your free zone entity is of the utmost importance. As the UAE's economy continues to diversify, tax regulations evolve accordingly. To navigate these changes effectively and ensure compliance while maximizing your business's growth potential, it's advisable to consult with experts who are well-versed in UAE corporate tax laws or reach out to Shams Free Zone for support. For more information and personalized guidance, please don't hesitate to contact our team of experts at info@shams.ae.