UAE Corporate Tax on Free Zones
UAE gives many opportunities to businesses, and free zones play a big role in attracting investors. The country has offered a tax-free environment in free zones for a long time, but with new laws, UAE corporate tax on free zones will be reality from June 2023. Businesses need to know about this tax, the rules, and how it affects them.
How UAE Corporate Tax Applies to Free Zones
UAE government set up free zones to help investors and bring world trade to the region. Companies in UAE free zones enjoy a 0% corporate tax rate on income from specific activities if they follow all legal requirements and keep economic substance in the UAE.
Free zone businesses can get 0% tax rate if they earn qualifying income from these sources:
- Transactions with businesses outside UAE
- Deals with businesses in other free zones or same free zone
- Sale of goods from a free zone business in a Designated Zone to UAE mainland importers
- Passive income from UAE mainland like interest, royalties, dividends, capital gains from shares
When Do Free Zone Companies Pay 9% Tax?
Not all free zone companies keep the 0% tax rate. Sometimes, a business must pay the standard 9% corporate tax. This applies when:
- They make deals with mainland UAE businesses not allowed under the “qualifying income” rules
- The company has a branch in UAE mainland and earns income from it
- They choose to switch to regular corporate tax. Once they switch, they can’t go back to 0% tax.
Qualifying Free Zone Person Explained
The law has made a new category called “Qualifying Free Zone Person.” This means a business registered, set up, or incorporated in a free zone can enjoy tax exemption on qualifying income if it meets these main conditions:
- Maintains economic substance in UAE
- Earns “qualifying income” set by cabinet decisions
- Does not choose to pay normal corporate tax rates
- Follows transfer pricing rules in the new tax law
If a business loses any of these conditions, or picks the standard tax, it will no longer be a “Qualifying Free Zone Person” and must pay 9% tax like other businesses.
When Does a Business Lose Qualifying Status?
According to UAE law, a free zone company will lose its special tax status if:
- It doesn’t follow economic substance rules in a tax period
- It doesn’t follow transfer pricing documentation rules
- It gets disqualified by not meeting the “qualifying income” test
- It voluntarily decides to join the 9% tax regime
Benefits and Responsibilities for Free Zone Businesses
For many years, UAE free zones gave benefits like 100% foreign ownership, no customs or VAT, and tax-free profits. With the new law:
- Free zone companies must register for corporate tax with the FTA
- They must file a tax return every year, even if their rate is 0%
- They must keep records and follow all legal requirements
- If they lose qualifying status, they must pay 9% tax on all their profits
Key Points for Free Zone Businesses
- Qualifying Free Zone Person = 0% corporate tax on qualifying income
- Income from most mainland activities = 9% corporate tax
- Companies must keep records and file returns each year
- Loss of qualifying status means full corporate tax applies
How Mubarak Al Ketbi (MAK) Auditing Can Help Free Zone Companies
If you feel like you’re walking on eggshells with all these tax rules, let Mubarak Al Ketbi (MAK) Auditing take the weight off your shoulders! Our team can help you:
- Register your free zone business for UAE corporate tax
- Check if your business meets “Qualifying Free Zone Person” rules
- Keep and organize required records
- File your corporate tax returns on time
- Give advice on transactions and compliance
For more information, visit or contact us:
- Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- WhatsApp/Call: +971 50 276 2132
