UAE Corporate Tax – Free Zone Companies Must Read This?

Will the income of free zone entities that conduct business in both the free zone and the UAE mainland be subject to Corporate Tax?

Free Zones are an important part of the UAE economy and have been central to achieving the country’s aim of encouraging foreign direct investment and enhancing the ease of doing business.

Whilst companies and branches that are registered in a Free Zone (hereafter referred to as “Free Zone Persons”) will be within the scope of the UAE Corporate Tax and subject to tax return filing requirements, the UAE Corporate Tax will honor the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements. 

In line with the original intention and purpose of Free Zones, a Free Zone Person can benefit from a 0% Corporate Tax rate on income earned from transactions with businesses located outside of the UAE, or from trading with businesses located in the same of any other Free Zone. The 0% Corporate Tax rate may also apply to income from certain regulated financial services directed at foreign markets.

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A Free Zone Person that has a branch in mainland UAE will be taxed at the regular Corporate Tax rate on its mainland sourced income, whilst continuing to benefit from the 0% Corporate Tax rate on its other income.

Where a Free Zone Person transacts with mainland UAE but does not have a mainland branch, the Free Zone Person can continue to benefit from the 0% Corporate Tax rate if its income from mainland UAE is limited to ‘passive’ income. This would include interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies.  

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The UAE wishes to maintain its status as the leading regional hub and headquarter location and, therefore, the 0% Corporate Tax regime will also apply to transactions between Free Zone Persons and their group companies located in mainland UAE. However, to ensure the Corporate Tax neutrality of such transactions, payments made to the Free Zone Person by a mainland group company will not be a deductible expense.

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Finally, a Free Zone Person located in a Designated Zone for Value Added Tax (VAT) purposes can benefit from the 0% Corporate Tax rate on income from the sale of goods to UAE mainland businesses that are the importer of record of those goods. 

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To prevent Free Zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE, any other mainland sourced income will disqualify a Free Zone Person from the 0% Corporate Tax regime in respect of all their income.

A Free Zone Person will at any point in time be able to make an irrevocable election to be subject to the regular Corporate Tax rate. Where a Free Zone Person benefits from the 0% Corporate Tax regime in respect of mainland sourced income, such income will be within the scope of withholding tax (to be applied at 0%).

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Note: The information in this article is meant to provide an initial introduction to the proposed UAE Corporate Tax regime and not be used for individual or business decisions as it does not represent the final legislation by the Government. More information o the UAE Corporate Tax regime will be made available in due course.