27 October, 2023

Corporate Tax Law in UAE : Activities & Qualifying FreeZones

corporate tax law in uae

What is Corporate Tax Law in UAE?

The Corporate Tax Law in the UAE outlines the tax rates for businesses known as Qualifying Free Zone Persons (QFZPs). QFZPs enjoy a 0% tax rate on Qualifying Income and face a 9% tax rate on Taxable Income that doesn’t qualify. Qualifying Income includes revenue from transactions with other Free Zone Persons and certain Non-Free Zone Persons, provided they meet specific criteria. The law also defines Excluded and Qualifying Activities, offers a de minimis provision, addresses Domestic Permanent Establishments, and emphasizes the need for adequate substance within Free Zones for QFZPs.

The UAE’s corporate tax history

The UAE’s corporate tax history is marked by its introduction of Corporate Tax Law. This law specifies that Qualifying Free Zone Persons (QFZPs) pay no tax on Qualifying Income and 9% on non-qualifying taxable income. Qualifying Income encompasses transactions with Free Zone and specific Non-Free Zone entities, subject to criteria. Excluded and Qualifying Activities are defined, with a de minimis provision in place. The law also addresses Domestic Permanent Establishments and emphasizes the importance of substantial business activities within Free Zones. This reflects the UAE’s commitment to creating a tax-friendly environment for businesses.

Features of Corporate Tax Regime

1. Taxation Rates: Under this regime, Qualifying Free Zone Persons (QFZPs) benefit from a 0% tax rate on Qualifying Income, while a 9% tax rate applies to taxable income that does not qualify. This competitive tax structure incentivizes businesses to operate within UAE free zones.

2. Qualifying Income Clarification: The law clearly defines “Qualifying Income,” encompassing revenue from transactions with both Free Zone and select Non-Free Zone entities, provided specific criteria are met. This adds transparency and certainty to tax obligations.

3. Excluded and Qualifying Activities: The regime distinguishes between activities that are considered Excluded (not eligible for tax benefits) and Qualifying (eligible for tax benefits). This classification helps businesses understand the tax implications of their activities.

4. De Minimis Provision: The law incorporates a de minimis provision, setting a threshold for non-qualifying revenue. If non-qualifying revenue does not exceed 5% of total revenue or AED 5,000,000, a lower tax liability is maintained. This provides flexibility for businesses with mixed income sources.

5. Domestic Permanent Establishment (PE): The concept of a Domestic PE is introduced, which taxes income attributable to businesses with a presence outside Free Zones. However, this does not affect the 0% tax rate on Qualifying Income, offering a balanced approach.

6. Substantial Business Presence: The regime stresses the importance of substantial business activities within Free Zones, such as core income-generating activities, assets, qualified employees, and operating expenditures. These can be managed by related parties or third parties, promoting economic substance.

Will Free Zones Be Affected By Corporate Tax?

No, UAE’s Free Zones are not significantly impacted by the Corporate Tax Law. The law primarily applies to Qualifying Free Zone Persons (QFZPs), who enjoy a 0% tax rate on Qualifying Income and a 9% tax rate on non-qualifying income. These favorable rates incentivize businesses to operate within Free Zones. Free Zones continue to offer an attractive tax environment, promoting foreign investment, and economic growth. The tax implications primarily concern the specific activities and income types of QFZPs, leaving the broader benefits of Free Zones intact.

Will free zone companies be taxed?

Free zone companies, referred to as Qualifying Free Zone Persons (QFZPs), will indeed face taxation under the UAE’s Corporate Tax Law. However, the impact is relatively modest. QFZPs will be taxed at a favorable 0% on Qualifying Income and 9% on non-qualifying taxable income. This tax framework maintains the attractiveness of UAE’s free zones for businesses. The taxation primarily hinges on the type of income and activities carried out, leaving room for favorable tax conditions within these zones, which continue to foster economic growth and foreign investment.

Will personal income be taxed in Dubai?

Dubai does not impose personal income tax on residents. The absence of such a tax is a significant advantage for those living and working in the emirate. Individuals can enjoy their earnings without the burden of income tax deductions. However, it’s important to note that while personal income is generally tax-free, there may be exceptions for certain specific cases, such as foreign individuals engaged in certain financial activities. Overall, Dubai’s tax policy makes it an attractive destination for residents seeking financial advantages.

Will there be capital gains tax on dividends in Dubai?

In Dubai, you can breathe easy as there are no capital gains taxes on dividends. The United Arab Emirates, including Dubai, has a tax-friendly environment when it comes to investment income. This means that the dividends you receive from your investments are typically not subject to capital gains tax. This attractive feature makes Dubai an appealing destination for investors, both local and foreign, looking to enjoy the benefits of a tax-efficient investment landscape. It’s one of the many reasons Dubai stands out as an investment hub in the region.

Key Highlights of the UAE CT Law for Qualifying Free Zone Persons

The United Arab Emirates (UAE) has recently provided crucial insights into the taxation rates for Qualifying Free Zone Persons (QFZPs) under its Corporate Tax Law. This information has been eagerly awaited by businesses, and it’s important to understand the nuances of these rates and definitions. Here are the key highlights:

Tax Rates for QFZPs

0% on Qualifying Income: QFZPs will not be taxed on Qualifying Income, providing a significant incentive for businesses operating within UAE free zones.

9% on Taxable Income that is not Qualifying Income: For income that doesn’t fall under the Qualifying Income category, a 9% tax rate will apply.

Definition of “Qualifying Income”

One of the most anticipated aspects was the clarification of “Qualifying Income,” which now includes:

1. Income from transactions with other Free Zone Persons: This encompasses most business interactions within the free zones, except for specific “Excluded Activities.”

2. Income from transactions with Non-Free Zone Persons: This applies to “Qualifying Activities” that are not considered “Excluded Activities.”

3. Any other income: As long as the QFZP meets the de minimis requirements.

Excluded Activities include:

  • 1. Transactions with natural persons: With some exceptions for Qualifying Activities related to shipping, aircraft, fund and wealth management.

Regulated banking, finance, leasing, and insurance activities.
Ownership or exploitation of intellectual property assets.

  • 2. Ownership or exploitation of immovable property: Except for commercial property transactions with Free Zone Persons in a Free Zone.

Qualifying Activities include:

1. Manufacturing and processing of goods or materials.

2. Holding of shares and other securities.

3. Ownership and operation of ships.

4.Regulated reinsurance and fund/wealth management.

5.Headquarter and financing services to related parties.

6.Financing and leasing of aircraft, logistics.

7.The distribution of goods in or from a designated zone: Subject to certain conditions.

De Minimis Requirements

The de minimis requirements are met when non-qualifying Revenue does not exceed 5% of total revenue or AED5,000,000, whichever is lower. Non-qualifying Revenue is revenue derived from Excluded Activities or activities that are not Qualifying Activities when the other party is a non-Free Zone Person. Certain revenue is exempt from these calculations, including revenue related to specific immovable property and Permanent Establishments.
Importantly, if a Free Zone Person fails to meet the qualifying conditions, they will be subject to a 9% tax rate for a minimum of five years.

Domestic Permanent Establishment (“PE”)

The Decisions introduce the concept of a Domestic PE when a QFZP has a business presence outside the Free Zone in the UAE. Income attributable to a Domestic PE is subject to a 9% tax rate, but it does not affect the 0% CT rate on Qualifying Income.
The normal PE rules of Article 14 of the CT Law apply to determine whether a QFZP has a Domestic PE, which generally includes mainland branches.

Adequate Substance in Free Zone

To maintain adequate substance, a QFZP should:
Conduct core income-generating activities within a Free Zone.
Maintain sufficient assets, qualified employees, and operating expenditures related to Free Zone activities. These activities can be outsourced to a Related Party or a third party under the supervision of the QFZP.