A Clearer Picture
The introduction of corporate tax in the UAE in June 2023 sent ripples through the business landscape, raising questions about its implications for free zones. While free zones have traditionally offered tax advantages, the new regime necessitates a closer look at the registration requirements.
Free Zones and the Corporate Tax Landscape:
- A Shift from Tax Exemption: Previously, most free zones in the UAE offered complete exemption from corporate tax. However, with the implementation of the new regime, this benefit is no longer universally applicable.
- The Rise of Qualifying Free Zone Person (QFZP): The new system introduces the concept of a QFZP. Businesses registered in free zones can qualify for a 0% corporate tax rate on their qualifying income.
Who Qualifies as a QFZP?
To be classified as a QFZP and enjoy the 0% tax benefit, a free zone company must meet specific criteria:
- Physical Presence:The company must maintain adequate workforce, assets, and core business activities within the UAE.
- Management and Control:The company's management and control should be exercised within the UAE.
- Qualifying Income: The company's income must stem from activities specified as "qualifying income" under the corporate tax regulations. (Examples: manufacturing, technology services, etc.)
- Non-Election for Standard Tax Rate: The company must not have opted to be taxed at the standard corporate tax rate (currently 9%).
- Transfer Pricing Compliance: The company must adhere to the UAE's transfer pricing regulations.
Free Zone Businesses and Registration:
- Registration: All free zone companies, regardless of their QFZP status, are required to register for corporate tax.
- Filing: Companies are obligated to file a corporate tax return each year, even if their qualifying income falls under the tax threshold (currently AED 375,000).
Important Considerations:
- Not all free zone activities qualify for the 0% tax rate. Businesses should consult the detailed list of qualifying activities outlined in the corporate tax regulations.
- Maintaining QFZP status requires ongoing compliance with the stipulated criteria.
Navigating the New Landscape:
- Consulting with a tax advisor familiar with the UAE corporate tax regime and free zone regulations is crucial. They can assess your specific situation and guide you through the registration process and potential tax implications.
- Regularly staying updated on any amendments or clarifications issued by the relevant authorities (Ministry of Finance and Federal Tax Authority) is essential.
Conclusion:
While free zones no longer offer a blanket exemption from corporate tax, the QFZP designation provides a significant advantage for businesses operating within the framework. Understanding the registration requirements and the concept of qualifying income is crucial for free zone companies to optimize their tax obligations under the new regime.