UAE: New tax exemption rules issued for companies in free zones

Companies doing businesses in free zones in the UAE need to meet certain criteria to be eligible for zero per cent corporate income tax on their activities and become a qualifying free zone person (QFZP), according to the latest guide issued by the Federal Tax Authority (FTA).

Among the conditions include “possession of audited financial statements, having substance, and earning income from qualifying activities”, said Thomas Vanhee, partner at Aurifer Middle East Tax Consultancy, adding that It is important to know that save for the cases of permanent establishments, the regime is largely an all-in or all-out regime.

Outlining the condition for disqualification, Vanhee said: “If a free zone entity earns non-qualifying income which crosses the threshold of Dh5 million or 5 per cent of its overall income, then the free zone entity’s income is entirely disqualified.”

Stay up to date with the latest news. Follow KT on WhatsApp Channels.

Nimish Goel, partner at WTS Dhruva, said FTA’s new guide addresses several grey areas like the availability of zero per cent corporate tax benefit on high sea sales, domestic bills to export outside the UAE mainland, and investment in cryptocurrencies.

“Free Zone businesses must note that interest income from surplus funds is non-qualifying. Free zone holding companies with no employees can now clearly meet the substance test based on director decisions - a big win!”, he said.

Free zone vs designated zone

Thomas Vanhee advised taxpayers to verify with their free zones if they’re considered a free zone or designated zone for corporate income tax purposes.

“For the distribution of goods from a designated zone to constitute a qualifying activity, there is no need for the goods to physically come to the UAE with third country trading (high sea sales). Equally, if purchases are made by a free zone company in a designated zone, the goods can come from the mainland and be exported and still conduct a qualifying activity. Even if goods go from mainland to mainland, the activity would qualify. Equally so, goods imported into the designated zone and subsequently imported would constitute qualifying activity,” said Vanhee.

He elaborated that the processing of goods is defined as a wider concept than just manufacturing.

• The role of tax treaties in transforming corporate tax landscape in UAE