Introduction:

The UAE government introduced Federal Decree-Law No. 47 of 2022, commonly known as the Corporate Tax Law, on 3 October 2022. This law, which was officially published in the UAE’s Official Gazette on 10 October 2022, serves as the legal framework for imposing corporate tax on businesses and corporations operating within the UAE. The Corporate Tax Law applies to tax periods beginning on or after 1 June 2023.

We provide an easy-to-understand overview of how the Corporate Tax Law applies to Free Zones and Free Zone Persons in the UAE. It outlines the requirements for a Free Zone Person to qualify as a Qualifying Free Zone Person (QFZP) and explains the benefits of obtaining this status, such as a 0% corporate tax rate on qualifying income.

Additionally, it clarifies what activities are considered Qualifying Activities and which are classified as Excluded Activities for tax purposes. This guide is particularly useful for businesses operating in UAE Free Zones, helping them understand how to comply with the tax laws and benefit from the available tax incentives.

Benefits of Implying for QFZP:

One of the most significant advantages of being a Qualifying Free Zone Person (QFZP) is the preferential tax treatment. Under UAE law, companies qualifying as QFZP are eligible for tax benefits, such as a 0% corporate tax rate on qualifying income. This status offers a massive advantage to businesses that meet specific regulatory requirements.

Key Benefits:

• 0% Corporate Tax on qualifying income, boosting profitability.
• Cost savings by avoiding the 9% tax on eligible activities.
• Full foreign ownership and streamlined processes in Free Zones.
• Outsourcing flexibility for core activities within Free Zones.
• Competitive advantage with tax benefits for international business.
• Revenue flexibility, as long as non-qualifying revenue is limited.
• Simplified tax compliance with fewer obligations like Small Business Relief.

The requirement to become a QFZP:

To qualify as a Qualifying Free Zone Person (QFZP) in the UAE, your business must meet the following criteria:

1. Substance: Demonstrate a substantial physical presence within the Free Zone by having qualified employees, assets, and operational expenses.
2. Qualifying Activities: Engage in activities that align with the Free Zone’s guidelines and contribute to the UAE economy.
3. De Minimis Threshold: Ensure that non-qualifying income (income earned outside the Free Zone or from non-qualifying activities) is minimal, not exceeding 5% of your total revenue or AED 5 million.
4. Transfer Pricing: Comply with transfer pricing regulations if you have transactions with related parties to ensure fair market value.
5. Financial Statements: Prepare audited financial statements that adhere to International Financial Reporting Standards (IFRS).
6. Free Zone Authority Requirements: Adhere to any additional specific requirements set by your chosen Free Zone authority.

By fulfilling these requirements, your business can enjoy the benefits of a 0% corporate tax rate in the UAE.

Benefits of Electing a Tax Person in a Free Zone:

Choosing a Tax Person in a UAE Free Zone can offer significant advantages for your business. Here are some key benefits:

1. Expert Guidance: Tax Persons possess in-depth knowledge of UAE tax laws and regulations, ensuring your business remains compliant and avoids costly errors.
2. Strategic Tax Planning: A qualified Tax Person can help you identify tax-saving opportunities and develop strategies to minimize your tax liability.
3. Audit Representation: In the event of a tax audit, a Tax Person can provide expert representation, helping you navigate the process and protect your business interests.
4. Reduced Tax Burden: By leveraging their expertise, Tax Persons can help you optimize your tax structure and potentially reduce your overall tax burden.
5. Compliance Assurance: A Tax Person can ensure your business remains compliant with all relevant tax laws and regulations, avoiding penalties and fines.
6. Time and Resource Savings: By outsourcing your tax functions to a professional, you can free up valuable time and resources within your business.
7. Peace of Mind: Knowing that your tax affairs are being handled by a qualified expert can provide you with peace of mind and allow you to focus on other aspects of your business.

Free Zone Person with no Revenue in the start-up Phase:

As a newly established Free Zone Person (QFZP), it’s common to face a period with no revenue during the initial stages of your business. However, the UAE tax authorities understand this and have provisions in place to support your business during this phase.

Key points to remember:

• Continued Activities: Maintain active engagement in qualifying activities within your Free Zone, even if they haven’t generated revenue yet. This demonstrates your commitment to operating a viable business.
• Avoid Non-Qualifying Income: Ensure that you don’t earn any income from activities outside the Free Zone or from non-qualifying activities. Focus on building your business within the Free Zone’s framework.
• Tax Authorities Understanding: The UAE tax authorities recognize that start-ups often require time to establish operations and generate revenue. If you’re actively pursuing qualifying activities, your QFZP status will generally not be jeopardized.

Free Zone Person with non-qualifying Revenue in the Start-up Phase:

As a QFZP, it’s crucial to understand the implications of non-qualifying revenue during your start-up phase.

• De Minimis Threshold: Non-qualifying revenue must be minimal, not exceeding 5% of your total revenue or AED 5 million.
• Potential Disqualification: Exceeding this threshold could lead to disqualification from your QFZP status.
• Impact on Tax Benefits: Disqualification could result in the loss of the zero corporate tax benefit.

To mitigate risks:

• Monitor your income: Keep track of revenue sources.
• Seek professional advice: Consult a tax expert.
• Plan for adjustments: Consider restructuring or exploring alternative revenue streams within the Free Zone.

Calculating Corporate Tax for a Free Zone Person:

As a QFZP, you generally enjoy a 0% corporate tax rate on Qualifying Income.

Key points:

• Qualifying Income: Income from qualifying activities within the Free Zone.
• Non-Qualifying Income: Income from non-qualifying activities may be subject to tax.
• De Minimis Threshold: Non-qualifying income must be minimal.
• Transfer Pricing: Comply with transfer pricing regulations.
• Auditing: Prepare audited financial statements.

To calculate your corporate tax:

• Determine Qualifying Income.
• Calculate Non-Qualifying Income.
• Apply De Minimis Threshold.
• Calculate Taxable Income.
• Apply 0% Rate.

For accurate calculations and compliance, consult a tax professional or refer to official guidance. Consider contacting MASAR Chartered Accountants Tax Experts for professional guidance.

4 Main documents for Free Zone Complete Corporate Tax:

Ensuring proper documentation is key to maintaining compliance and QFZP status. The four main documents required for corporate tax filing include:

1. Federal Decree-Law 47 of 2022
2. Cabinet Decisions (including cabinet decision no 100 of 2023 on determining Qualifying income for a QFZP).
3. Ministerial Decisions (Including Ministerial Decision 265 of 2023 regarding qualifying activity and excluded activity).
4. FTA Guide (Including the Guide of Free Zone Persons)

How MASAR Chartered Accountants Help you:

At MASAR Chartered Accountants, we specialize in Corporate Tax Implementation Services in UAE, offering expert guidance and support for Free Zone Companies. As a certified Tax Agency in UAE, MASAR helps businesses:

• Achieve QFZP status by ensuring all eligibility criteria are met.
• Handle corporate tax filings, ensuring compliance with UAE law.
• Minimize tax liabilities by leveraging the best tax strategies.
• Provide ongoing tax advisory to navigate complex regulations.

Our team ensures that your corporate tax obligations are handled efficiently, allowing you to focus on growing your business.

Conclusion

Corporate tax implementation in the UAE is a significant development, particularly for Free Zone companies. By obtaining QFZP status and adhering to UAE tax laws, businesses can benefit from reduced tax rates and exemptions. Understanding the tax requirements and benefits of Free Zone companies can lead to substantial savings and business growth.

FAQs

1. What is QFZP?
   QFZP stands for Qualifying Free Zone Person, a status that allows businesses in Free Zones to benefit from a 0% corporate tax rate on qualifying income.
2. How can I apply for QFZP status?
   To apply for QFZP status, your business must meet certain criteria, including maintaining adequate substance in the UAE and generating qualifying income.
3. Is there corporate tax for Free Zone companies without revenue?
   Yes, even if there’s no revenue, Free Zone companies must still file corporate tax returns, often as nil returns.
4. What happens if my revenue doesn’t qualify for QFZP?
   non-qualifying revenue is subject to the standard corporate tax rate applicable to mainland companies.
5. How can MASAR Chartered Accountants help with corporate tax?
   MASAR Chartered Accountants offer Corporate Tax Services in UAE, assisting businesses in compliance, tax filing, and minimizing tax liabilities.