UAE and Dubai Corporate Tax Guide for Free Zone and Offshore Companies

The UAE, hence Dubai, is no longer what we usually call a Pure Tax Haven, where the 0% corporate tax regime is straight forward and a simple process.  Recently the UAE started implementing Corporate Tax on Free Zone entities in accordance to the Corporate Tax Law (Federal Decree-Law No.60 of 2023).

Free Zone Companies are now not automatically entitled to the 0% corporate tax rate, as they only Qualifying Free Zone Companies can benefit from this 0% income tax rate.

Now you have Qualifying Free Zone Persons, Qualifying Income, Qualifying Activities, Economic Substance Requirements, Non-Qualifying Income, Transfer Pricing Rules, Audited Financial Statement Requirement, De Minimis Requirement, and more.

Key highlights:

• Only Qualifying Free Zone Companies can obtain 0% corporate tax rate on Qualifying income. All QFZC Non-Qualifying income will be subject to 9% Corporate Tax Rate without the need to exceed the AED 375,000  threshold.

• Free Zone Companies must have Adequate Economic Substance in the Free Zone.

• The Free Zone Recipient of a Good or Service must be the Recipient Beneficiary of such transaction for it to be a Qualifying Income. 

• Business-to-Business transactions only are considered tax-free Qualifying Income. Business-to-Natural Persons transactions are Non-Qualifying income and are subject to taxes. 

• Income from Services or goods provided to Natural Persons is not Qualifying Income

• Services or goods not within the Qualifying Activities will not be considered Qualifying income, i.e. Counseling to non-Free Zone Companies will be subject to taxes.

• Excluded Income is Non-Qualifying Income even if it is provided to other Free Zone Persons or within the Qualifying Activity List.

• Non-qualifying income must not exceed 5 million AED or 5% of the Company Total Revenue for the Free Zone company to be a Qualifying Free Zone Person. (minimis requirement).

• Audited Financial Statements are a must to be a QFZC

• Something as simple as a start-up with no qualifying income because it is in its set up and organizational phase, selling a computer to an employee, can convert your company to the Standard Corporate Tax Rate and destroy your UAE Tax-Free Strategy and Plan for 5 tax years.

What are Free Zone Persons?

Free Zone Persons are Free Zone companies or legal entities formed or established in an authorized Free Zone or a Designated Zone in the UAE.

Non-Free Zone persons are Companies and entities incorporated or formed outside UAE authorized Free Zones, this includes UAE mainland companies, and any foreign entity like a BVI Company, Seychelles Foundation, or just 

Qualifying Free Zone Person (QFZP).

A Free Zone Person must meet ALL the following requirements to be considered a Qualifying Free Zone Person: 

• the Free Zone Person must maintain adequate substance in a Free Zone

• the Free Zone Person must derive Qualifying Income.

• the Free Zone Person must not have made an election to be subject to the standard Corporate Tax rate

• the Free Zone Person must comply with the arm’s length principle for transactions with Related Parties and for arrangements between the Free Zone parent and its Foreign Permanent Establishments or Domestic Permanent Establishments

• the Free Zone Person must maintain Transfer Pricing documentation

• the Free Zone Person must maintain audited Financial Statements, and

• the Free Zone Person’s non-qualifying Revenue must not exceed the lower of AED 5 million or 5% of its total Revenue (de minimis requirement).

What are the consequences if a Free Zone Company fails to comply with one requirement?

The free zone company will not be considered a Qualifying Free Zone Person and will be subject to the Standard Corporate Tax Rate for its current tax year, and the following/subsequent 4 tax years.

Adequate Economic Substance Requirement.

This requirement will depend on and will have to be with the actual Free Zone Person reality and income, meaning it must have adequate assets, office space, full-time employees, and incur an adequate amount of operating expenditures in the Free Zone (or Designated Zone for distribution activities) to perform its core income-generating activities.

Qualifying Income

• transactions with other Free Zone Persons, provided those Free Zone Persons are the Beneficial Recipient of the transactions and the transactions do not relate to Excluded Activities

• transactions relating to Qualifying Activities that are not Excluded Activities.

• Income derived from the ownership or exploitation of Qualifying Intellectual Property.

• Any other income, provided the de minimis requirements are met.

So transactions with other Free Zone Persons, and transactions from Qualifying Activities with non-Free Zone Persons, will be considered Qualifying income, as long as they are not within the Excluded Activities list.

Additionally, the Free Zone person receiving the Service or Goods must be the Beneficiary Recipient of such service or goods, and not act as an agent or intermediary.

For example, if a Free Zone Company provides Counseling Services, this service will be tax free (Qualifying Income) only if it is provided to another Free Zone Company, but if your Free Zone company provides Counseling Services to a foreign company or non-Free Zone Person, this income will not be considered tax-free (Qualifying Income) because counseling services is not within the list of Qualifying Activities that can be provided tax free.

B2B transactions only if the recipient is a Non-Free Zone Person

Additionally, if a Free Zone company performs a Qualifying Activity, but this service or good is provided to a Natural Person, this income will not be Qualifying income, because providing services or goods to natural persons is an Excluded Activity. This means that, in addition, your Free Zone company must only derive income from Business-to-Business transactions if it plans to transact with foreign companies or Non-Free Zone entities.

For explanation purposes, Non-Free Zone persons can include foreign companies formed outside of the UAE, mainland UAE companies, or any company not formed in a UAE Free Zone.

What are the Qualifying Activities?

The Qualifying Activities list is truly important as this is the list of activities a Free Zone Person can provide to Non-Free Zone Persons while still maintaining the 0% Corporate Tax Rate. 

• Manufacturing of goods or materials. 

• Processing of goods or materials. 

• Trading of Qualifying Commodities. 

• Holding of shares and other securities for investment purposes 

• Ownership, management, and operation of Ships 

• Reinsurance services. 

• Fund management services

• Wealth and investment management services.

• Headquarter services to Related Parties. 

• Treasury and financing services to Related Parties. 

• Financing and leasing of Aircraft - Distribution of goods or materials in or from a Designated Zone

• Logistics services.

These activities above cannot be within the Excluded Activities List

Excluded Activities

The following Excluded Activites will be subject to the Standard 9% Corporate tax, even if it is provided to Free Zone Persons or if it is a Qualifying Activity:

• any transactions with natural persons, except transactions in relation to: ▪ ownership, management and operation of Ships ▪ 

  • fund management services that are subject to the regulatory oversight of the Competent Authority in the UAE ▪ 

  • wealth and investment management services that are subject to the regulatory oversight of the Competent Authority in the UAE ▪ 

  • financing and leasing of Aircraft, including engines and rotable components 

• banking activities. 

• insurance activities, other than reinsurance activities, and captive insurance-related activities forming part of headquarters services to Related Parties.

• finance and leasing activities, other than transactions in relation to: 

  • ownership, management and operation of Ships 

  • treasury and financing services to Related Parties 

  • financing and leasing of Aircraft, including engines and rotable components - 

• ownership or exploitation of Immovable Property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons 

Companies with no Qualifying Income because they have not started operations

If a company does not have Qualifying Income because it has not started operations, i.e. is in the start up phase, it will be exempt from having Qualifying Income to qualify as a Qualifying Free Zone Company, 

But let’s say this company sold a computer to an employee, this income since it is a Non-Qualifying Income and that exceeds the 5% de minimis requirement (because we are assuming the company didn’t have income because it is at the start-up phase so the computer sale exceeds the 5% total revenue), then the Free Zone company will not be a Qualifying Free Zone Person, and will be taxed at the standard corporate tax rate of 9% for its current and subsequent 4 tax years. Something as simple as that can destroy your future Tax-Free Strategy and Plan in the UAE.

The Recipient of the goods and services must be the Beneficial Recipient. Meaning, the Recipient must not be acting as a nominee, agent, for a third party.

What is non-Qualifying Revenue?

From the above, we can conclude that Non-Qualifying Revenue is income derived from:

• Excluded Activities

• Activities that are not Qualifying Activities where the other party to the transaction is a Non-Free Zone Person, and

• Transactions with a Free Zone Person where such Free Zone Person is not the Beneficial Recipient of the relevant services or Goods

Transfer Pricing Considerations

A Free Zone Company has to transact under and comply with transfer pricing rules, including the arm’s length principle and must comply with the Transfer Pricing documentation requirements relating to transactions or arrangements with its Related Parties and Connected Persons.

Here, in summary, the QFZP must comply with the OECD, UAE, and International standards when it comes to Transfer Pricing.

Other Considerations

The whole guide above is just to give you a quick glance and feeling of the current Corporate Tax treatment and situation in the UAE. Each of the topics covered above still have much more to be taken into consideration, for example certain revenue is excluded from the de Minimis requirement, each Qualifying Activity has its own rules, exceptions, way to calculate what constitutes the Qualifying and Non-Qualifying Income, Permanent Establishment Considerations, and much more.

To learn more about these topics you can contact us, our services include:

Services

• UAE and Dubai Free Zone Company Formation

• UAE Dubai Investor, Partner, and Employee Visas.

• International Tax Planning

• UAE Corporate Tax Law Counseling.

• Corporate Tax Registration in the UAE