The United Arab Emirates administration implemented a new business tax regime as part of a shift in fiscal policy. This historic ruling represents the nation’s first attempt at corporate taxation. It also encourages budgetary sustainability and conforms to international norms. Furthermore, this new structure distinguishes companies that are based in planned free zones from those that operate on the mainland. Within the approved free zone, corporations are subject to a corporate tax rate of either 0% or 9%. This also applies to qualifying free zone individuals. Depending on their qualifying income, that is. Qualifying income also includes income from activities that take place inside the free zone.
Understanding corporate tax presents numerous challenges for businesses. Now let’s examine the most typical issues that UAE businesses deal with.
Complexity of the tax code
- Lack of understanding of tax laws
- Difficulty in preparing tax returns
- Determining taxable income
- Understanding tax credits and deductions
These issues may have a big effect on a UAE company. Companies may overpay taxes or submit inaccurate tax returns. Now let’s discuss the corporation tax laws that apply to organizations that are free zones.
Corporate tax in Free Zone entities
At the minister’s request, cabinet decisions define a free zone, which is a specific area inside the state. The UAE has several free zones, and many businesses register as 100% foreign-owned subsidiaries.
Most free zone entities in the United Arab Emirates have been regarded as major drivers of international trade. In addition, free zones benefit from 100% foreign ownership, 100% VAT exemptions, 100% customs, 100% returns on profits and capital, and, most importantly, corporate tax exemptions.
Tax rates in free zones
Tax rates in free zones are determined by the qualifying income that qualifying businesses and qualifying free zone individuals generate, which must be entirely generated from activities conducted within the free zones. Additionally, free zone businesses must comply with certain regulatory requirements.
Tax rates are as follows in free zones:
Income that meets certain requirements qualifies for a 0% tax rate. The standards may come from export-focused initiatives or serving global markets.
In free zones, qualifying income that doesn’t fit the specified requirements is subject to 0% tax.
Exemptions:
Furthermore, royalties, dividends, and interests paid to eligible free zone and free zone firms are tax-free.
Economic substance regulations (ESR)
Businesses in free zones and individuals who meet the requirements for such zones must abide by the Economic Substance Regulations (ESR). Companies must have a significant economic presence in the Free Zone to comply with these restrictions. They should also hire qualified personnel, incur appropriate operational expenses, and establish a physical office.
Corporate tax rates for free zones:
- All companies other than free zone entities
- Nil for taxable income less or up to AED 375,000.
- 9% on taxable income exceeding AED 375,000.
- Free zone entities
- Nill on Qualifying Income.
- 9% on non-qualifying income.
Conditions for Qualifying Free Zone Person in UAE
The following requirements must be satisfied by the business to be eligible for Free Zone Person status in the UAE:
Establishment in a Designated Free Zone
The business ought to be physically present in one of the UAE’s designated free zones. Moreover, several regions inside the UAE are known as designated free zones. Additionally, these have been given economic benefits, including loosened rules and tax breaks.
Substantial Economic Presence
The business must show that it has a significant financial presence in the approved free zone. This also entails paying fair operating costs, keeping a real office, and hiring qualified staff. Additionally, the business must operate its primary operations inside the free zone. For instance, producing, distributing, or processing goods or services.
Derivation of Qualifying Income
The business needs to generate qualifying revenue. Additionally, revenue earned from activities carried out entirely inside the approved free zone qualifies as qualifying income. fulfilling regulatory standards as well. Among the qualifying activities are the following:
- Operations aimed at foreign markets.
- Export-focused initiatives.
- Initiatives that support the designated free zone’s economic growth.
- Adherence to the ESR (economic substance regulations)
Furthermore, the business cannot have chosen to pay the ordinary corporate tax rate in the United Arab Emirates. Furthermore, this implies that the business had to have decided to be categorized as a QFZP, furthermore gains from the favourable tax treatment linked to this position.
Conclusion
We studied company tax in free zone regions in this blog. Companies must understand the tax laws. In the UAE, ebs Chartered Accountants is a top accounting and bookkeeping company. To assist firms in comprehending the corporate tax environment, we offer an extensive array of corporate tax services. Here are some ways that our team of experts can help companies navigate the corporate tax environment:
Corporate tax advisory
A team of tax specialists at Corporate Tax Advisory Firm offers customized guidance on corporate tax planning. We also offer techniques for tax optimization and compliance. We can assist companies in determining their tax obligations as well as tax deductions and exemptions.
Corporate tax compliance
ebs makes sure companies comply with all corporate tax regulations. It also covers filing taxes on time, registering for taxes, and preparing tax returns. We support companies with resolving tax disputes and assessments as well as keeping appropriate tax records.
Corporate tax representation
ebs helps companies deal with the Free Trade Area. In addition to representing companies in tax appeals, we may offer advice on tax queries and help settle tax disputes.
However, we also offer other services, including bookkeeping and accounting, auditing, due diligence audits, and much more. Therefore, you need to call us right now to talk more about our services and to speak with one of our professionals.
