UAE Corporate Tax Law for Free Zones

تيم إليوت
Welcome to Lawgical, the UAE’s first and still only regular legal podcast. My name is Tim Elliott, and as always, here’s our expert: managing partner of the Dubai-based legal firm Yamalova & Plewka, Ludmila Yamalova. Ludmila, lovely to see you.

لودميلا يامالوفا
Good to see you too, Tim, as always, and thanks for being here.

تيم إليوت
In this episode of Lawgical, we’re covering everything you need to know about corporate tax for businesses based in free zones. We’ve got loads to get through, Ludmila, and this is one of those topics where you really need to drill down into the details. The details are emerging because corporate tax is still relatively new. It’s been making headlines in the UAE for about a year. We know the default rate is 9%. Does that apply to businesses in free zones as well?

لودميلا يامالوفا
The short answer is yes, it does. Free zones are equally affected by the UAE corporate tax. As a general rule, all free zone companies are subject to the 9% corporate tax rate unless they qualify for very specific exceptions. If those exceptions apply, there’s a chance some free zone businesses could be subject to a 0% corporate tax rate.

تيم إليوت
How do we know which free zone businesses are subject to corporate tax? Is it explicitly stated in the law? And if it is, what laws cover this?

لودميلا يامالوفا
Yes, it is explicitly stated in the law. Several laws govern the application of corporate tax for free zones. The primary legislation is Federal Decree-Law No. 47 of 2022 on Corporate Tax, which was enacted in 2022 and came into effect in 2023. Recently, in October 2023, additional regulations were issued to clarify the application of corporate tax in free zones.

The key regulations are UAE Cabinet Resolution No. 100 of 2023, titled Qualifying Income for Qualifying Free Zone Persons, and UAE Ministerial Resolution No. 265 of 2023, which outlines qualifying and excluded activities. These resolutions provide more clarity on how the corporate tax law applies to free zones.

تيم إليوت
So, the main law was introduced last year, but it has evolved through these additional regulations. It sounds like the legal framework is still being refined.

لودميلا يامالوفا
Exactly. The legal framework is continuously evolving, and we expect more decrees, resolutions, and regulations to clarify and refine the implementation of the corporate tax law for free zones.

تيم إليوت
Would it be fair to say the general rule is that a 9% corporate tax rate automatically applies to all free zone businesses?

لودميلا يامالوفا
Yes, that’s accurate. Initially, many assumed free zone businesses would be exempt from corporate tax because of the term “free zones.” However, the new regulations have flipped that assumption. The general rule is that the 9% corporate tax applies to all businesses in the UAE, including free zones, unless specific exceptions apply.

تيم إليوت
What are these exceptions?

لودميلا يامالوفا
The exceptions are nuanced and somewhat complex. I’ve spent hours with my team analyzing the regulations. To simplify, the exceptions apply to free zone businesses engaged in certain activities. Here are the four main categories:

1. Businesses conducting activities not designated as excluded activities.
2. Businesses conducting qualifying activities.
3. Businesses deriving income from qualifying intellectual property activities.
4. Businesses earning income from commercial properties located in free zones.

تيم إليوت
That’s quite technical. Could you break it down a little further?

لودميلا يامالوفا
Certainly. Let’s focus on qualifying activities and excluded activities.

Qualifying activities are specific types of business operations that allow a free zone business to qualify for a 0% corporate tax rate. These include industries like manufacturing, trading qualifying commodities, reinsurance, aircraft leasing, and logistics services, among others. There are 11 defined categories of qualifying activities.

On the other hand, excluded activities are those that will always be subject to the 9% corporate tax rate, regardless of whether the business is in a free zone or deals with other free zone entities. Examples include banking, insurance, finance, leasing, and transactions with natural persons.

تيم إليوت
Are all businesses divided into qualifying and excluded activities, or are there other classifications?

لودميلا يامالوفا
There are businesses that don’t fall into either category. For example, law firms or accounting firms may not be listed as qualifying or excluded activities. These businesses might fall under a separate set of rules.

تيم إليوت
Let’s talk about income now. What is qualifying income?

لودميلا يامالوفا
Qualifying income is the income generated by a business engaged in qualifying activities or income not derived from excluded activities. For example, if a free zone business leases aircraft (a qualifying activity), its income would qualify for a 0% tax rate.

تيم إليوت
What about small businesses? Is there any tax relief for them?

لودميلا يامالوفا
Yes, businesses with revenue below AED 3 million per fiscal year can apply for small business relief, which exempts them from the corporate tax. However, this is not automatic; businesses must opt-in for this relief.

تيم إليوت
And what about commercial properties in free zones?

لودميلا يامالوفا
Income from commercial properties in free zones can qualify for the 0% tax rate if certain conditions are met. For example, the property must be owned by a free zone entity, located within a free zone, and rented to another free zone business.

تيم إليوت
To wrap up, what’s your key takeaway for businesses preparing for corporate tax?

لودميلا يامالوفا
The 9% corporate tax rate is the default for all free zone businesses unless they meet specific criteria for a 0% rate. Businesses need to:

1. Assess their activities and income to determine if they qualify for exceptions.
2. Update their accounting practices to align with UAE tax laws.
3. Maintain audited financial statements if they qualify for a 0% tax rate.

This is a paradigm shift for UAE businesses, and staying informed as the law evolves is critical.

تيم إليوت
That’s another edition of Lawgical. If you’re based in a free zone in the UAE, this is everything we know about corporate tax as of today. Thank you, Ludmila, for your insights.

لودميلا يامالوفا
شكراً لك، تيم.

تيم إليوت
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