Can Your Business Benefit from 0% Corporate Tax in UAE Designated Zones?
The United Arab Emirates (UAE) has introduced a federal corporate tax regime effective from June 1, 2023, imposing a standard 9% tax on taxable income exceeding AED 375,000. However, businesses operating within designated free zones can benefit from a 0% corporate tax rate, provided they meet specific criteria. This guide outlines the conditions under which businesses can qualify for this tax exemption.
Understanding Qualifying Free Zone Person (QFZP):
To benefit from the 0% corporate tax rate, a business must be recognized as a Qualifying Free Zone Person. The criteria include:
Legal Entity in a Free Zone: The business must be a juridical person (e.g., a company) established in a UAE free zone.
Adequate Substance: The business should have substantial economic presence in the free zone, including adequate assets, employees, and operating expenditures.
Qualifying Income: The income should be derived from qualifying activities, as defined by the UAE tax authorities.
Compliance: The business must comply with transfer pricing rules and maintain audited financial statements in accordance with International Financial Reporting Standards (IFRS).
De Minimis Requirements: Non-qualifying income should not exceed 5% of total revenue or AED 5 million, whichever is lower.
Qualifying Activities:
The UAE Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023 outline activities considered as qualifying for the 0% tax rate:
#Manufacturing and Processing: Production or transformation of goods or materials.
#Trading of Qualifying Commodities: Trading in physical goods, including raw materials.
#Holding of Shares and Securities: Investment in shares and other securities for investment purposes.
#Ownership and Operation of Ships: Managing and operating maritime vessels.
#Reinsurance Services: Providing reinsurance services under UAE regulatory oversight.
#Fund, Wealth, and Investment Management: Offering financial services under UAE regulatory supervision.
#Headquarter Services: Providing administrative services to related parties.
#Treasury and Financing Services: Managing financial operations for related parties.
#Financing and Leasing of Aircraft: Leasing aircraft, including engines and components.
#Logistics Services: Managing the flow of goods and services.
#Distribution Activities: Distributing goods from a designated zone to resellers or processors.
#Ancillary Activities: Supporting activities necessary for the performance of the above.
Excluded Activities:
Certain activities are excluded from the 0% tax benefit, including:
#Transactions with Natural Persons: Except for specific qualifying activities.
#Banking and Insurance Activities: Unless specified under qualifying activities.
#Ownership or Exploitation of Immovable Property: Except for commercial property transactions within free zones between free zone persons.
#Ownership or Exploitation of Intellectual Property Assets: Unless specified under qualifying activities.
#Ancillary Activities to Excluded Activities: Supporting activities related to excluded activities.
Compliance and Consequences:
Failure to meet the qualifying criteria can result in the business being subject to the standard 9% corporate tax rate for the current and subsequent four tax periods. Therefore, maintaining compliance with the outlined requirements is crucial for businesses seeking to benefit from the 0% tax rate.
The UAE’s corporate tax regime offers significant advantages for businesses operating within designated free zones, provided they engage in qualifying activities and adhere to compliance requirements. Understanding these criteria is essential for businesses aiming to optimize their tax position in the UAE.
FAQs
Can my business qualify for 0% corporate tax in UAE free zones?
Yes, your business can benefit from the 0% corporate tax rate in UAE designated free zones if it meets the criteria of a Qualifying Free Zone Person (QFZP). This includes being legally established in a free zone, having substantial economic presence, earning income from qualifying activities, and complying with UAE tax regulations such as audited financials and transfer pricing rules. If you’re searching for “UAE 0% corporate tax eligibility” or “how to qualify as QFZP,” these are the essential requirements.
What are considered qualifying activities for 0% tax in UAE designated zones?
The UAE has clearly defined qualifying activities eligible for the 0% corporate tax rate, including:
- Manufacturing and processing
- Trading of qualifying commodities
- Reinsurance and financial services
- Holding and managing investments
- Aircraft leasing and logistics
- Distribution within free zones
These activities must be carried out by entities within UAE designated zones. Searches like “qualifying activities for free zone tax exemption” or “list of QFZP activities in UAE” often lead to these official guidelines.
What happens if my free zone business doesn’t meet the QFZP requirements?
If a business in a UAE free zone fails to meet QFZP criteria—such as exceeding the de minimis threshold or engaging in excluded activities—it becomes subject to the standard 9% corporate tax. Additionally, the non-qualifying status applies for the current and next four tax periods, which could significantly impact financial planning. If you’re wondering “what disqualifies a business from 0% UAE tax” or “penalties for QFZP non-compliance,” maintaining proper documentation and activities is key.