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Top Requirements for Free Zone Businesses to Benefit From 0% Corporate Tax in the UAE

“Are free zone companies exempt from corporate tax in the UAE?” has become a frequently asked question after the government announced that it will introduce corporate tax from June 1st 2023. It’s a valid question as free zones have been providing many tax exemptions for businesses, unlike the mainland licensing authorities. Free zone businesses need to understand their corporate tax obligations for which they can consult with corporate tax consultants in Dubai. Meanwhile, the following blog will tell you whether free zone businesses are exempt from corporate tax and whether they will continue to benefit from tax exemptions under the UAE corporate tax law.

Will Free Zone Companies Fall Within the Scope of Corporate Tax in the UAE?

Free zone companies and branches registered in any of the 40 plus free zones in the UAE will be termed as free zone persons under the corporate tax law. As per the regulations of corporate tax in the UAE, free zone persons will fall within the scope of corporate tax. It means free zone persons will have to meet corporate tax requirements such as tax return filing.

However, the UAE corporate tax law will honour the tax incentives received by the free zone persons if they maintain adequate substance and comply with all regulatory requirements. Such free zone persons can benefit from the 0% corporate tax rate in the UAE instead of the standard rate of 9%. Free zone businesses can assess their corporate tax obligations with the help of corporate tax consultants in Dubai.

Tax on Free Zone Person’s Transactions Outside the UAE

As per the proposed UAE corporate tax law, a 9% corporate tax will be levied on annual taxable income exceeding AED 375,000 and a 0% tax will be imposed on taxable income not exceeding AED 375,000. However, free zone persons can benefit from a 0% corporate tax rate on income earned from transactions with businesses outside of the UAE or from trading with businesses in the same any other Free Zone. The 0% UAE corporate tax will also apply to income earned from certain regulated financial services directed at foreign markets. Corporate tax consultants in Dubai can help you to assess the incomes eligible for the 0% tax rate.

Tax on a Free Zone Person with a Mainland Branch

It is common for some free zone persons to have a branch in the UAE mainland. The standard rate of 9% will apply to the mainland sourced income of free zone persons with a UAE mainland branch. However, a 0% corporate tax rate will apply to the free zone person’s other income.

Tax on Mainland Income of Free Zone Persons without a Mainland Branch

In some cases, a free zone person without a mainland branch may generate taxable income by transacting with the UAE mainland. Free zone persons transacting with the mainland without a mainland branch can continue to benefit from the 0% corporate tax rate if their mainland-sourced income is limited to ‘passive’ income. Passive income may include interest and royalties, and dividends and capital gains generated from owning shares in mainland UAE companies.

Transactions Between Free Zone Persons & Group Firms

The 0% UAE corporate tax rate will apply to transactions between Free Zone Persons and their group companies located in the UAE mainland. This will enable the UAE to maintain its status as the leading regional hub and headquarter location. However, payments made to the free zone person by a mainland group company will not be treated as a deductible expense This will helps the UAE to maintain corporate tax neutrality on such transactions.

Corporate Tax Rates on Designated Zones

Of the 40 plus free zones, some zones have been classified as Designated Zones for Value Added Tax (VAT). Designated Zones are treated as outside the UAE for VAT for certain supplies of goods. A free zone person operating in such a Designated Zone in the UAE can benefit from the 0% corporate tax rate on income earned from the sale of goods to the UAE mainland businesses that are the importer of record of those goods. Free zone companies located within the Designated Zones are advised to consult with corporate tax consultants in Dubai to determine their relevant tax treatment.

Audit Requirements for a Free Zone Person

Free zone businesses need to meet certain administrative requirements to benefit from the 0% corporate tax rate in the UAE. Free zone persons must have audited financial statements if they want to benefit from the 0% CT regime. Corporate tax advisors in Dubai can help free zone businesses to get their books of accounts audited to benefit from the 0% tax rate.

Hire the Best Corporate Tax Consultants in Dubai, UAE

Hiring the best corporate tax consultants in Dubai such as Jitendra Chartered Accountants (JCA) is essential for businesses to prepare for the new tax regime. JCA’s corporate tax services in Dubai can help the companies to assess the tax rates applicable to them. JCA can help the companies to assess whether the businesses fall within the scope of the tax, prepare the relevant documents and financial records, advise on applicable tax rates, exempted income, tax group formation, and other key requirements including tax payments, tax return filing and audit of financial statements. Ensure corporate tax compliance and avoid relevant penalties by availing of JCA’s corporate tax services in Dubai, UAE.

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