Free zone entities play a crucial role in enhancing the economy of the United Arab Emirates and have also contributed greatly to the struggles of the country in achieving its aim of attracting direct investments from foreign countries and facilitating business in the country. Local and multinational companies that are registered in free zones are referred to as free zone persons in UAE corporate tax law. According to the new corporate tax regime, all free zone registered persons including small companies or large multinational companies will be subject to corporate tax in UAE.
Corporation Tax on Free Zone Businesses
Following is all the detail that the Ministry of Finance has shared about corporate tax on free zone entities in the new corporate tax regime;
- All small and large-scale businesses that are registered in the free zones of UAE fall under the scope of corporate tax in UAE and are required to file for tax. However, the free zone persons that comply with all the legislation and regulation requirements will still be able to enjoy the tax incentives that they are currently being given as per the new CT regime.
- The new CT regime respects the aim and purpose of the free zones and for this reason, a free zone business will be able to enjoy a corporate tax rate of up to 0 percent for all income gained from business transactions performed with businesses outside the UAE.
- A free zone business will be able to enjoy a corporate tax rate of up to 0 percent for all income gained from business transactions performed with businesses located in other free zones of the same category.
- A free zone business will also be able to enjoy a corporate tax rate of up to 0 percent if it regularly performs certain financial services in non-UAE markets.
- A business whose main office is registered in the free zone of UAE but also has branches in other parts of UAE will be subject to the regular corporate tax rate for the income earned from branches other than the free zone. However, the income it earns within the free zone will still be subject to a 0 percent CT rate.
- If a free zone business does not run any branches on the mainland of UAE but performs certain transactional activities outside the free zone, it will be able to enjoy a 0 percent corporate tax rate given that the income being transacted falls under passive income instead of active income. This can include capital gains, dividends, royalties, and interests, that might come from business shares with mainland entities.
- Companies often work in groups and UAE encourages it because it maintains UAE on its position as a headquarters business location and a leading business hub. For such free zone companies that work in groups with mainland companies and transact with them, the new CT regime offers a 0 percent CT rate. However, these transactions need to be considered neutral and for this purpose, any payment made by mainland group business to the free zone business will not fall under the deductible expense category of income.
- Another category of free zone businesses can enjoy a 0 percent corporate tax rate on income gained by selling goods on the mainland of UAE and this is such a business that executes in a designated zone for VAT (Value Added Tax) reasons.
- Apart from all the categories that enjoy a 0 percent tax rate as mentioned above, no other business that falls under CT will be able to enjoy a 0 percent tax rate. Any business that disqualifies for a 0 percent CT rate is strictly discouraged by the Ministry of Finance to take unfair advantages as per the new CT regime.
- The new CT regime allows the free zone businesses to make elections in order to be able to be subject to the general rate of corporate tax any time they want.
What if a business does not have a permanent establishment in the UAE free zone?
According to the new corporate tax in Dubai, UAE, companies that are not registered in the UAE or do not have a permanent establishment in the UAE will not fall under the scope of CT. However, if a company that is not registered permanently but earns UAE-sourced income will be subject to the corporate tax in UAE. This is the only case where a person can be taxed in the UAE without permanent registration. Therefore, it does not matter whether this person is located in the mainland or free zone in the UAE, the rule is the same for a business anywhere in the UAE. Earning from a business in the UAE whether or not it is permanently registered, is enough for the business to be subject to corporate tax as per the Ministry of Finance.