It is important to note that the United Arab Emirates (UAE) recently put into effect a comprehensive corporate tax system with rules about Free Zone Persons (FZPs) who meet the qualifying requirements (QFZPs). The purpose of this blog is to provide information on the key areas of corporate taxation for QFZPs with a permanent establishment (PE) in Dubai, United Arab Emirates, by the most recent rules issued by the Federal Tax Authority (FTA) for Freezones Person in May 2024.   

Overview of Corporate Tax in the UAE  

Corporate profits and net income are subject to the UAE Corporate Tax (CT) regime, which went into force in January 2022. The purpose of this tax is to accelerate growth and change. With a few exceptions for companies whose financial year begins in January, the corporate tax uae structure will take effect on June 1, 2023, for the first fiscal year.  

Qualifying Free Zone Person (QFZP) Status  

To qualify for a 0% corporate tax rate, the Tax-Free Zone (FZP) must meet the requirements set out in State Constitution No. 47 of 2022 and all subsequent decrees. These include:  

• Validity: The FZP must ensure that the Free Zone is usable. 
• Qualifying income: The FZP must generate income from qualifying activities. 
• No election for regular CT: No election for regular CT FZP cannot elect to pay regular corporate tax as per UAE CT laws. 
• Arm’s length rule: Arm’s length rules shall be followed in the transfer of the requested price and related documents. 
• Audit of annual accounts: FZP must audit the annual accounts of its clients for tax purposes. 
• De minimis threshold: Non-qualified income cannot exceed the de minimis threshold.

Domestic Permanent Establishment (PE) in Dubai  

Domestic PEs in Dubai are offices or branches of a foreign company based in the UAE. For a QFZP with a local PE based in Dubai, the following rules apply: 

• Registration: Companies in the FZP must apply for corporate tax registration within the specified period. Non-residents with branches in PE-free zones are required to register with CT even if they generate income from the UAE.
• Tax Liability: Designated Zones (DZs) designated for VAT compliance are considered CT DZs for this purpose. However, the FTA Director recommends contacting the competent authority in the Free Zone to confirm that the company is in a Free Zone or a designated customs and customs area.
• Transfer price: The arm’s length principle should be taken into account when determining the amount of money, a PE earns in a country. This ensures that transfer costs comply with the new regulations.

Important Considerations regarding QFZPs which include Domestic PEs in Dubai  

• Requirements: To maintain adequate conditions, the QFZP must ensure that local PE is involved in activities closely related to the main income-generating activities of free trade. This is a requirement that includes activities that support or make a minor contribution to the main business but are closely related to the main business. 

• Eligible Activities: The QFZP must generate revenue from eligible activities as defined in detail in the FTA Guides. Examples include distribution, where goods are delivered directly from a supplier in one country to a customer in another country as well as foreign sales. 

• Undisclosed Activities: This guide also describes activities that are prohibited outside the designated territory, such as the distribution of products intended for users in the UAE. This is not a qualifying event. 

• De minimis threshold: The QFZP must ensure that its eligible income does not exceed the de minimis threshold. The limits are determined by applying the arm’s length principle to the amount of money that PEs can bring into the country. 

Demonstration of Corporate Tax for QFZP using an Domestic Permanent Establishment  

Example: Company J  

• Company J earns AED 1,000,000 from qualifying activities in the exemption zone and AED 2,000,000 from activities carried out by a domestic business. Costs include AED 600,000 from the Free Zone parent company, AED 1,400,000 from the Domestic Permanent Agency, and AED 300,000 from the Domestic Permanent Agency for HR management activities. Company J confirms that 50% of its HR management costs are attributable to free zones Under the long-arm rule, expenses and income are allocated between eligible income and taxes. 

  

Items	Total	Domestic Permanent Establishment (Taxable Income)	Free Zone Parent (Qualifying Income)
Revenue	3,000,000	2,000,000	1,000,000
Less: Direct expenses	2,000,000	1,400,000	600,000
Less: Allocated expenses	300,000	150,000	150,000
Profit	700,000	450,000	250,000

 

Eligible income is taxed at zero, resulting in a tax of AED 250,000. Taxable income from a permanent establishment in the country is subject to a corporate tax rate of 9%, resulting in a tax of AED 40,500. Nothing else has changed. 

These figures do not mean that no further changes are required, as set out in Article 20 of the Tax Code. 

The Role of Corporate tax Consultant in Dubai, UAE  

Tax experts in Dubai are crucial in providing advice and guidance to Sole Proprietorships (FZPs) and Domestic Permanent Establishments (DPEs) to successfully navigate the UAE corporate tax system. It is beneficial for FZPs to understand the tax implications for DPEs while ensuring compliance with the 9% corporate tax rate. Income level is not considered a requirement. ebs chartered accountants can help determine appropriate revenue while maintaining compliance with transfer pricing rules and compliance requirements. In addition, they provide guidelines for maintaining audited financial statements and ensuring that all nonqualified expenses do not exceed de minimis limits. Their expertise ensures that FZPs can fully meet their tax obligations and improve their tax returns.