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In a significant tax reform, the United Arab Emirates (UAE) has introduced a tailored corporate tax regime for entities in Free Zones, signifying a notable shift in the tax landscape. This new regime opens avenues for businesses operating in these zones to potentially benefit from a 0% Corporate Tax rate, subject to specific conditions. This article aims to provide a detailed examination of the new regime, outlining the qualification criteria and implications for businesses within UAE Free Zones.
Qualification as a Free Zone Person
The new regime classifies certain Free Zone entities as 'Qualifying Free Zone Persons,' rendering them eligible for a 0% Corporate Tax rate on their 'Qualifying Income.' This favorable rate is applicable until the expiry of the incentive period outlined in the Free Zone’s legislation, subject to potential renewal.
Criteria for Qualification
To attain the status of a Qualifying Free Zone Person, an entity must:
Earn Qualifying Income: This includes income from transactions within the Free Zone or with Non-Free Zone Persons, provided they are part of 'Qualifying Activities' and not categorized as 'Excluded Activities.'
Maintain Adequate Substance in the UAE: The entity must demonstrate significant economic presence and active operational activities within the Free Zone.
Meet the De Minimis Requirement: A limited portion of non-qualifying income is permissible, provided it stays within specified thresholds.
Opt-out of General Corporate Tax: The entity should elect not to be taxed under the general corporate tax regime.
Adhere to Transfer Pricing Rules: Compliance with transfer pricing norms and documentation stipulations is crucial.
Maintain Audited Financial Statements: This is necessary for Corporate Tax Law purposes.
Additional conditions may be set by the Minister for an entity to be recognized as a Qualifying Free Zone Person.
Qualifying Income and Excluded Activities
0% Corporate Tax Rate: Qualifying activities eligible for the 0% rate, as outlined in Ministerial Decision No. 265/2023, range from manufacturing and processing goods to specific financial and logistics services.
Exclusions: Conversely, Free Zone companies engaged in 'Excluded Activities' are subject to the standard 9% Corporate Tax. These exclusions include transactions with natural persons, banking, certain insurance and finance activities, and dealings involving immovable property outside specific provisions.
Adequate Substance Requirements
To meet this requirement, Free Zone entities must conduct or outsource their primary income-generating activities within the Free Zone. The assessment of 'adequate substance' is bespoke, considering the nature of the business, employee qualifications, operational expenses, and physical assets.
De Minimis Requirements
This provision allows for a marginal amount of non-qualifying income, capped at the lower of AED 5,000,000 or 5% of total revenue, without affecting eligibility for the 0% tax rate.
Electing for General Corporate Tax Rates
Entities can choose general corporate tax rates, influencing their Qualifying Free Zone Person status and binding them for a specified period.
Implications and Examples
Entities engaged in non-qualifying activities are generally ineligible for the 0% rate, while those involved in approved Free Zone activities can leverage the benefits of this regime.
Conclusion
The UAE's new Free Zone Corporate Tax regime offers appealing tax incentives but imposes rigorous compliance requirements. Businesses in these zones must judiciously assess their operations and financial practices to ensure eligibility for the 0% Corporate Tax rate. This regime underscores the UAE's commitment to fostering a conducive business environment while aligning with global tax practices.