FEDERAL TAX AUTHORITY (FTA) UPDATE: NEW CORPORATE TAX GUIDE RELEASED FOR FREE ZONE BUSINESSES

This article has been researched and written by the Tax & Compliance Team at Creation Business Consultants. AI has not been used in generating this article.

CORPORATE TAX:

The tax imposed by the Corporate Tax Law on juridical persons and Business income.

FREE ZONE CORPORATE TAX RULES:

UAE Free zones are an essential component of the UAE economy and are important to the country’s and the world’s economic growth and change. Free zones provide businesses with several benefits including the ability to engage in more legal entity forms and commercial activities, reduced administrative procedures, contemporary and sophisticated infrastructure, developed business communities, and relaxed limits on foreign ownership.

TAXATION OF A QUALIFYING FREE ZONE PERSON (QFZP):

If the Free Zone Person meets all the conditions to be a QFZP, it will be subject to Corporate Tax at the following rates:

• 0% on its Qualifying Income,
• 9% on its Taxable Income that is not Qualifying Income.

CONDITIONS TO BE A QUALIFYING FREE ZONE PERSON:

The term “Free Zone Person” refers to the juridical person. This means that a Free Zone Person may:

• Have its head office in a Free Zone and have a branch outside the Free Zone, or
• Have a head office in the UAE (outside a Free Zone) or another country and have a branch within a Free Zone. In this situation the head office would be generally considered a Domestic Permanent Establishment or a Foreign Permanent Establishment, respectively.

QUALIFYING INCOME:

Generally, the Corporate Tax rules for Free Zones are intended to provide a 0% Corporate Tax rate on Qualifying Income from:

• QFZPs and Free Zone Persons engage in transactions (with the Free Zone Person acting as the Beneficial Recipient).
• Specific actions carried out from inside a Free Zone’s (or a Designated Zone’s, for distribution activities) designated geographic boundaries.

NON – QUALIFYING INCOME:

The following sources of income will not result in Qualifying Income; instead, their income will be taken into account for calculating Taxable Income that is subject to the 9% Corporate Tax rate:

• Income attributable to a Foreign Permanent Establishment,
• Income attributable to a Domestic Permanent Establishment,
• Income from Immovable Property (other than Commercial Property located in a Free Zone when the income arises from a transaction with a Free Zone Person),
• Income from the ownership or exploitation of intellectual property (other than Qualifying Income from Qualifying Intellectual Property).

TRANSFER PRICING DOCUMENTATION:

Complying with the Transfer Pricing documentation requirements for transactions and agreements with its Related Parties and Connected Persons is another prerequisite for becoming a QFZP.

ARM’S LENGTH PRINCIPLE:

One of the conditions to be a QFZP is that a Free Zone Person must comply with the arm’s length principle When determining Taxable Income, income and expenses relating to transactions and arrangements between Related Parties must be consistent with the results that would have been realised if Persons who were not Related Parties had engaged in similar transactions or arrangements under similar circumstances.

ELECTIONS NOT TO BE A QFZB:

A QFZP will not be qualified for several common characteristics of the Corporate Tax regime because it is a recipient of the 0% Corporate Tax rate. A QFZP, for example, is not eligible for the 0% Corporate Tax rate on Taxable Income up to AED 375,000 that is offered to a non-QFZP. Additionally, a QFZP is not eligible for Tax Grouping or any of the special relief programs offered by the Corporate Tax Law, including the transfer of Tax Losses, Small Business Relief, Qualifying Group Relief, and Business Restructuring Relief.

TAX REGISTRATION:

A Free Zone Person, including a QFZP should register for Corporate Tax with the Federal Tax Authority (FTA) in the form and manner and within the timelines prescribed by the FTA. Failure to submit a Tax Registration application as per the prescribed timelines will result in Administrative Penalties.

PREPARING AUDITED FINANCIAL STATEMENTS:

A Free Zone Person is required to prepare and maintain audited Financial Statements for Corporate Tax purposes (regardless of its Revenue) as a condition of being a QFZP.

For more information regarding how Creation can assist with tax services in the UAE, contact us today!

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