The Federal Tax Authority (“FTA”) has recently released a guide (“Guide”) that outlines the conditions and procedures for applying the corporate tax on the free zones persons.

The FTA emphasized in the Guide which aligns with the free zone tax regime that, free zones are considered an essential part of the state’s economy and play an important role in driving its growth and economic transformation, locally and globally alike.

It is worth noting that free zones provide many advantages for businesses, including for example, fewer restrictions on foreign ownership, simplified administrative procedures, modern and advanced infrastructure, and additional types of legal entities and commercial activities.

The Guide illustrates the conditions which a free zone person must fulfil to be classified as a qualifying free zone person and benefit from a 0% corporate tax rate on qualifying income.

If those conditions are not or ceased to be fulfilled during any relevant tax period prescribed by the FTA, the defaulting qualifying free zone person will be considered to have failed to meet the criteria to benefit from the free zone qualifying regime and will not be treated as a qualifying free zone person from the beginning of the relevant tax period in which the conditions are not fulfilled and for the later four tax periods.

The Guide also clarifies the treatment of income generated from immovable property, qualifying intellectual property, and refers to tax compliance requirements.

It further refers to the qualifying activities and excluded activities for a qualifying free zone person, as indicated in Ministerial Decision No. 265 of 2023 Regarding Qualifying Activities and Excluded Activities for the Purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.

The Guide provides examples to clarify the application of the corporate tax law to free zone persons. It further outlines how corporate tax is calculated for free zone persons, and determines the qualifying income and the income which is subject to 9% tax. Furthermore, it includes the conditions for maintaining actual and sufficient presence of a qualifying person based in the free zones, and the criteria for determining a local or foreign permanent establishment.

Finally, a reference has to be made to the statement of the FTA , that when a qualifying free zone person operates through a permanent establishment in the UAE but outside the free zones or in a foreign country, the profits of such permanent establishment will be subject to a corporate tax at 9%.

Read the full guide here

Authored by: Hassan Tawakalna