Are UAE Free Zone companies exempt from Corporate Tax?
- Jan 1
- 3 min read
The introduction of corporate tax in the UAE has raised many questions among business owners, especially those operating within Free Zones. One common question is whether Free Zone companies are exempt from UAE corporate tax. This post explores the details of corporate tax exemptions for Free Zone businesses, clarifies common misconceptions, and provides practical insights for entrepreneurs navigating the UAE’s tax landscape.
What Is Corporate Tax in the UAE?
Corporate tax is a government levy on the profits earned by companies. The UAE introduced a federal corporate tax system effective from June 1, 2023, with a standard rate of 9% on taxable income exceeding AED 375,000. This move aligns the UAE with global tax standards and aims to diversify government revenue sources beyond oil.
The tax applies to most business activities conducted within the UAE, including mainland companies and Free Zone entities. However, the rules for Free Zone companies differ in some important ways.
How Free Zones Work in the UAE
Free Zones are designated areas that offer business-friendly environments with benefits such as 100% foreign ownership, simplified licensing, and customs advantages. They were created to attract foreign investment and promote economic growth in specific sectors.
Each Free Zone operates under its own regulatory authority and offers certain incentives to companies registered within its jurisdiction. However, a very common misconception, which we'll discuss in this post, is that corporate tax exemption is that all Free Zone companies are exempt from corporate tax.
For more detail on Free Zone companies and a comparison with Mainland companies, read our post here.
Are Free Zone Companies Exempt from Corporate Tax?
The short answer is not entirely. Free Zone companies are not automatically exempt from UAE corporate tax. Instead, they may qualify for a 0% corporate tax rate under certain conditions and only on specific 'Qualifying Income' (which are unlikely to apply to most trading companies).
Conditions for 0% Corporate Tax Rate in Free Zones
The Free Zone company must conduct its business primarily within its Free Zone only, except for certain types of business income (e.g. manufacturing of goods, holding investments in shares, etc.).
The company must comply with all regulatory requirements of the Free Zone authority.
The company must meet substance requirements, such as having adequate staff, premises, and operational activities in the Free Zone.
The company must prepare audited financial statements annually.
If these conditions are met, the Free Zone company can benefit from a 0% corporate tax rate on its qualifying income. This means the company is effectively exempt from paying corporate tax on profits generated within the Free Zone or from certain business activities.
What Happens If Conditions Are Not Met?
If a Free Zone company conducts business with the UAE mainland without a proper license or fails to meet substance requirements, it will be subject to the standard corporate tax rate of 9% on its taxable income. This change encourages companies to maintain genuine economic activity within Free Zones.
Examples of Free Zone Tax Treatment
A holding company in a Jebel Ali Free Zone owns shares in other companies and other receives dividends and operates from its Free Zone office may benefit from the 0% corporate tax rate.
A trading company in Jebel Ali Free Zone that sells goods to customers in the UAE mainland without a mainland license will be subject to corporate tax at 9% on those mainland sales.
A manufacturing firm in Abu Dhabi Global Market Free Zone with proper substance and no mainland business will enjoy corporate tax exemption on qualifying income.
Practical Tips for Free Zone Businesses
Understand your business activities: Determine where your customers are located and whether you need a mainland license.
Maintain substance: Ensure your company has real operations, staff, and office space in the Free Zone.
Keep accurate records: Document your income sources and compliance with Free Zone regulations.
Consult experts: Tax laws can be complex. Seek advice from tax consultants or legal advisors familiar with UAE corporate tax and Free Zone rules.
Impact on Business Planning
The introduction of corporate tax and the specific rules for Free Zone companies require business owners to review their structures and operations. Companies that previously relied on tax holidays must now ensure compliance with new regulations to maintain their tax benefits.
This change also encourages transparency and genuine economic activity, which can improve the reputation and sustainability of Free Zone businesses.
Summary
Free Zone companies in the UAE are not automatically exempt from corporate tax but can qualify for a 0% tax rate if they meet specific conditions. These include conducting business mainly within the Free Zone or outside the UAE, complying with Free Zone regulations, and maintaining substance requirements.
The rules are complex so business owners should seek professional advice to benefit from the available exemptions. Contact Amana Accounts - we're here to help.
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