Learn how the new corporate tax law impacts Free Zone businesses in the UAE. Explore qualifying activities, tax benefits, and how BMS Auditing can support compliance and financial growth.
The UAE is well known as a global financial center and a business hub in the Middle East, offering a significant number of benefits to businesses and foreign investors. Historically, one of the most attractive features has been a 'nil' tax on profits earned in the country, barring a few cases.
However, in December 2022, the UAE government announced the introduction of a Federal Corporate Tax (CT law), which took effect on June 1, 2023. That's a very big change for any business operating in Free Zones, as having the relevant knowledge of the new tax structure will play a significant role in compliance and proper financial planning.
Introduction of New Corporate Tax Law
For non-Qualifying Free Zone Persons, corporate tax is levied at a rate of 9% on annual taxable profit exceeding AED 375,000. However, Companies within approved Free Zones remain exempt from paying 0% tax on qualifying income as long as the conditions the tax authorities impose on them are met. Non-qualifying income for QFZPs is taxed at 9%.
This UAE Freezone corporate tax framework affects all businesses in the city, including foreign companies that have an office here. The implications of corporate tax may vary, depending on whether a business operates in a Free Zone or mainland, meaning business owners should be able to understand changes so they do not attract penalties.
Natural vs. Juridical Persons
To understand how corporate tax has an impact on free zone businesses, it is firstly important to define what is known as 'Person' in UAE tax law.
- Natural Person: Any living individual, irrespective of age, recognized as a taxable person under the applicable tax regulations.
- Juridical person: A Juridical person is defined as an established entity recognized in the Federal Laws of the United Arab Emirates, along with the laws of the respective Emirate wherein this is implemented. It encompasses businesses and organizations under the UAE law and those recognized by other authorities in the UAE. In simple words, it refers to any organization recognized by law that may enter into a contract, holds property rights, and can conduct legal procedures.
Natural and juridical persons can operate in Free Zones but only the juridical persons, if they fulfill certain conditions, fall in the definition of QFZPs qualified for tax benefits.
Who Is Eligible as a QFZP?
The requirements to qualify as a QFZP under the new corporate tax regime include the following:
- Adequate Substance: Your business must have an essential physical presence in the UAE, such as office space and employees.
- Qualifying Income: Income mainly derived from compliant business activities undertaken in the Free Zone or with international clients.
- Exclude from Standard CT Rates: Entities are not allowed to choose to be taxed on normal corporate tax rates applied to non-Free Zone companies.
- Threshold of Non-Qualifying Income: The percentage of non-qualifying income cannot be more than 5% of the total revenues, or AED 5 million, whichever is lesser.
- Retention of Audited Accounts: Maintain the right books of accounts and also audited accounts which are as per the International Financial Reporting Standards.
- Requirements of the Free Zone Authority: All businesses will have to comply with any requirements, over and above those set out by the relevant Free Zone authority.
The Cabinet Decision about the publication of the Free Zones designated continues, so businesses are advised to first instance refer to their relevant Free Zone authority to ascertain whether the corporate tax would be waived.
Qualified Activities and Income
Business activities are categorized into three. These are qualifying activities, excluded activities, and other activities. Only qualifying activities can tax relief be claimed. Qualifying activities include activities recognized under the following heads:
- Manufacturing and processing of goods
- Trading of qualifying commodities
- Holding shares and securities for investment
- Logistics services
- Fund management services.
Excluded activities mean some Free Zone business activities could be barred from the 0% rate on tax, so knowing what these classes entail is crucial.
Qualifying Income
Qualifying income refers to eligible income as eligible to receive 0% corporate tax relief in Free Zone entities. Determination can be made from the character of the transaction and who or which party is involved:
- Transactions with Another Free Zone Person: Income from a transaction involving another Free Zone person may qualify as qualifying income.
- Transactions with Non-Free Zone Persons: Income arising from activities carried out with persons not located within the Free Zone is not included.
- Other Transactions: Other transactions, subject to de minimis requirements, are also includible.
There are some types of income, which are considered outside of these computations such as income of permanent establishments of domestic or foreign enterprises and income of immovable properties situated outside the Free Zone.
What is the De Minimis Tax Rule?
One of the significant rules for Free Zone regulations is known as the De Minimis Rule. Should your non-qualifying income be less than 5 percent of total revenue or less than AED 5 million, you qualify for the tax rate of 0%. For example, if your total revenue is AED 10 million and your non-qualifying income is AED 400,000, that is 4% of your total revenue, the benefits provided under the 0% tax rate will result to you as well.
Impact of Corporate Tax on Businesses
The introduction of corporate tax raises the risk of a more significant tax burden, which may discourage businesses that were previously exempt from such taxation. To avoid such risks, there is a need for proactive steps by organizations to prevent unnecessary cash leakages.
One effective strategy for monitoring and controlling costs in this evolving landscape is to collaborate with financial experts such as BMS Auditing. Here’s how BMS can assist your business:
- Identification of Tax-Deductible Expenses: BMS can help identify eligible tax-deductible expenses, manage cash flow, and maximize your tax deductions.
- Time and Cost Savings: Engaging experts ensures accuracy in tax return submissions, minimizing the risk of errors and thereby saving both time and money.
- Valuable Insights: BMS provides analytical insights into company expenditures and helps strategize cost control measures.
How BMS Can Assist Free Zone Companies with Corporate Tax Compliance in the UAE
- Tax advisory services: Drawing on extensive knowledge about the very latest regulations on corporate taxes and how such regulations are being applied to Free Zone entities.
- Substance requirements: Ensure a company is not breaching substance requirements by failing to provide business activities demonstrating adequate physical presence and operational activities.
- Income Qualification Analysis: Identify the source of income as qualified to meet the 0% corporate tax threshold under Free Zone rules.
- Financial Documentation Support: Assist management in preparing and maintaining adequate financial records, documentation, and regulatory compliance.
- Tax Registration Assistance: Guide clients through the process for registration for tax purposes and ensure that all necessary filings are completed.
- Tax Compliance Monitoring: Monitor in real-time for compliance with tax laws and draft changes that may impact their Free Zone status.
- Custom Tax Strategies: This will be developed on an individual basis to ensure that the business will reap maximum tax benefits according to requirements.
- Training and Workshops: Conduct training sessions on corporate tax obligations as well as best practices to achieve compliance among staff employees.
- Representation in Tax Matters: Represent them in discussions or dispute issues with tax authorities.
Such services will enable Free Zone companies to ensure compliance and maximize their tax benefits.
Navigating the Corporate Tax Landscape: How BMS Auditing Can Support Free Zone Businesses
Grasping the implications of new Free Zone tax regulations in the UAE is essential for navigating the evolving corporate tax landscape, especially for Free Zone businesses. BMS Auditing offers professional support to help business owners manage their finances and ensure compliance with regulatory requirements, enabling informed decision-making for success in this shifting environment.
Call us today to discover how BMS Auditing can assist your business in adapting to these changes and achieving financial growth!
