Corporate Tax for Mainland & Free Zone Companies in the UAE

The United Arab Emirates (UAE) is rapidly becoming one of the world’s leading commercial centers; the changes made in the corporate income tax laws have gained much attention from investors and corporations. New rules state that free zones will be considered different from mainland business entities in the country. For this reason, entities interested in doing business in the UAE often seek corporate tax advisory in Dubai before deciding to establish a business in the free zones or on the mainland. Hence, through the help of professionals, companies can get on the right track and meet the country’s new tax laws.

A Brief History of Corporate Taxation in the United Arab Emirates

Over the past few years, the UAE has been regarded as one of the tax-free nations, with its citizens not required to pay income tax while the majority of companies do not pay corporate taxes. The United Arab Emirates, for instance, got most of its revenue from nationalized and privatized oil wells and banking sectors, and some specific sectors paid certain taxes. Nevertheless, because the government has shifted focus from oil as the main source of revenue, there is a recognition of the need to seek other sources of income.

This led to the implementation of the value-added tax (VAT) in 2018, followed by the implementation of the 9% corporate income tax in January 2022, which will come into effect on June 1, 2023.

Why is Corporate Tax Charged in the UAE?

The application of corporate taxes in the UAE has several strategic goals. First, it aims to raise the country’s position as one of the leading business hubs by synchronizing its taxation regulations with those of advanced countries. This move is expected to increase the credibility and ease of business in the UAE, thus attracting more local and foreign investors. Also, the revenue realized is directed towards development projects and services vital to society. Through the use of corporate tax, the UAE is targeting the achievement of its development goals and strategic objectives for the benefit of the business community and the population. The injection of funds into basic sectors is expected to rewrite the economic history through positive change and growth.

Regulations and Legal Framework

Free Zone Entities

Some certain laws and regulations are applicable in the free zones of UAE, which differ from those on the mainland. The United Arab Emirates has over forty free zones of diverse nature, and each of them operates under a different legal framework and has its regulatory authority. For instance, the Dubai Multi Commodities Centre (DMCC), Jebel Ali Free Zone (JAFZA), and Abu Dhabi’s Masdar City Free Zone have their rules and regulations, which may include but are not limited to 100 percent foreign ownership and full capital flow back to home country.

Originally, free zones promised zero income tax for corporations and individuals for up to half a century, which has been one of the biggest advantages of the UAE free trade zones. The UAE recently issued the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses. This law sets a corporate income tax of 9% starting from June 1, 2023, but there are certain incentives and exceptions for free zone companies.

Mainland Entities

Corporate tax can be seen as the first comprehensive set of rules on corporate taxation in the UAE. Mainland companies will be taxed 9% on their taxable income derived from the country, provided it exceeds Dh375,000. It enhances the compliance and reporting regimes required by the law, thus putting the UAE in line with the best tax compliance standards.

While free zone companies are prohibited from operating in the local market, mainland companies are allowed to trade in the local market and internationally. Recently, the Commercial Companies Law in UAE has been revised. This has made it possible for 100% ownership of mainland companies in many sectors because there was a difference between the mainland and free zone entities.

Tax implications

Free zone entities that meet all the stipulated requirements may still be allowed certain tax exemptions depending on the circumstance. The provision of Article (18) of the Corporate Tax Law has to do with the exemption of free zone entities provided that they fulfill certain conditions and are considered Qualified free zone Persons (“QFZP”). The conditions for obtaining QFZP status are as follows: 

Based on the stated criteria, the following recommendation can be made: It is suggested to ensure adequate substance is held within the UAE.

• Derive Qualifying Income.

• The free zone entity should not have opted for corporate taxation, although entities are allowed to opt for corporate taxation for one reason or another to seek exemption.

• Adhere to all the country’s transfer pricing laws and regulations and the necessary documentation.

• Satisfy any other requirements as may be set by the Minister in charge.

Out of the conditions stated above, a free zone entity can be granted QFZP status, exempting the entity from the standard corporate tax rate of 9%. Article (3) of the Corporate Tax Law specifies the applicable tax rates for QFZP: 0 percent tax rate on Qualifying Income and 9 percent tax rate on the taxable income that does not fall under the definitions of Qualifying Income in Article 18 of the Corporate Tax Law or any other decision by the Cabinet.

Mainland entities will be subject to the new corporate tax but with less operational red tape than the free zone companies have. They will also benefit from the corporate tax regime tax relief and enjoy small business relief, business restructuring relief, and transfer within a qualifying group.

It will be costly for free zone and mainland companies to implement new changes, and they may need help understanding the latest tax laws. It is important to know the requirements and documents required to avoid penalties.

Professional Tax Advisory Services in Dubai

As the new tax laws are designed to bring coherence to the existing tax rules, they also create certain openings for entities to consider their business and tax models. As MNCs navigate through these changes, strategic planning and compliance will remain vital for organizations to seize opportunities and minimize risks in their business operations.

The IMC Group is the most reliable team of experts for the entire range of services for corporate tax planning in 2024. It will help you meet the requirements of the complex corporate tax structure and avail the professional guidance of experts who can guide you through the process.

Mainland entities will be subjected to the new corporate tax but with less prohibitive conditions than free zone companies. They will also benefit from the corporate tax regime’s tax relief, including small business relief, business restructuring relief, and transfer within the qualifying group.

It could be difficult for free zone and mainland companies to follow the regulations; therefore, it is important to understand the new tax law, the requirements that must be met, and the documentation that must be provided to avoid penalties.

FAQ’s

1. What is the corporate tax rate for mainland companies in the UAE?

The corporate tax rate for mainland companies in the UAE is set at 9% on taxable income exceeding AED 375,000. Income below this threshold is subject to a 0% tax rate, providing relief for smaller businesses and startups.

2. Are free zone companies in the UAE subject to corporate tax?

Free zone companies in the UAE generally enjoy tax exemptions; however, certain conditions apply. Free zone businesses that do not conduct business with the mainland UAE are usually exempt from corporate tax. It’s essential to check the specific regulations of each free zone, as rules may vary.

3. How does corporate tax affect businesses with operations in both mainland and free zones?

Businesses with operations in both mainland and free zones need to segregate their income derived from each jurisdiction. Income earned from mainland operations is subject to the 9% corporate tax, while income from qualifying free zone activities may remain exempt, depending on the free zone’s regulations and adherence to the conditions set by the UAE government.

4. What are the compliance requirements for corporate tax in the UAE?

Companies must register for corporate tax with the Federal Tax Authority (FTA), file annual tax returns, and maintain proper accounting records. Compliance also includes paying any taxes due within the stipulated deadlines to avoid penalties. Detailed guidelines are provided by the FTA to ensure businesses meet all obligations.

5. Are there any incentives or exemptions available for corporate tax in the UAE?

Yes, the UAE offers various incentives and exemptions to attract investments, particularly in free zones. These can include full tax exemptions for a specified period, provided the companies meet certain criteria such as not engaging in business with the mainland and adhering to economic substance regulations. Additionally, small businesses with income below AED 375,000 benefit from a 0% tax rate.