Introduction

Businesses within the UAE free zones must familiarize themselves with the Federal Tax Authority’s (FTA) new Corporate Tax Guide for Free Zone Persons recently released to ensure adherence and fully benefit from the 0% corporate tax rate on qualifying income. This comprehensive overview aims to elucidate these new directives and the associated advantages.

Some Key Points on the New Corporate Tax Guide for Free Zone Persons

The FTA has recently published an extensive guide outlining the criteria under which free zone businesses can enjoy a 0% corporate income tax rate on their qualifying activities. This update follows the implementation of the new federal corporate tax law, effective June 1, 2023, which imposes a 9% corporate tax rate on taxable income above AED 375,000, with specific exemptions for entities in free zones.

Key Tax Exemptions and Conditions

Qualifying Free Zone Person (QFZP) Status:

• Audited Financial Statements: Entities must maintain audited financial statements.
• Economic Substance: Businesses must demonstrate substantial operations within the free zone.
• Qualifying Activities: Income must originate from qualifying activities.

Income Threshold for Non-Qualifying Income:

Based on the new Corporate Tax Guide for Free Zone Persons, if non-qualifying income exceeds AED 5 million or 5% of the total income, the entire income might lose eligibility for the 0% tax rate.

Specific Activity Clarifications under the New Corporate Tax Guide for Free Zone Persons

• High Sea Sales: Revenue from high sea sales is eligible for the 0% tax rate.
• Domestic Billing for Export: Domestic sales billed for export outside the UAE mainland qualify.
• Cryptocurrency Investments: Investments in cryptocurrencies are considered qualifying income.
• Interest Income: Interest income from surplus funds is not qualifying.
• Holding Companies: Free zone holding companies without employees can pass the substance test through director decisions.
• Commodity Trading: Goods do not need to be traded on a commodity exchange to qualify, benefiting sectors like oil, gas, gold, and agriculture.

Additional Provisions and Clarifications

• Goods Processing: This includes more than just manufacturing activities.
• Third Country Trading: Distribution involving third-country trading is eligible for tax benefits without physical import to the UAE.
• Investment for Personal Use: Excess cash invested for personal use qualifies as financing to related parties.
• Financial Statements: QFZPs are not required to prepare separate financial statements for qualifying and non-qualifying income.

Corporate Tax Compliance and Registration

The FTA has advanced the deadlines for corporate tax registration, requiring businesses to register significantly earlier than initially planned. Instead of the previous deadline of September 2025, the new staggered deadlines in 2024 require some businesses to register by May 31, with all businesses registered by December 2024. This new Corporate Tax Guide for Free Zone Persons groups businesses based on the month their original license was issued, regardless of the year.

Registration Requirement:

• All taxable persons must register with the FTA and obtain a Tax Registration Number.
• Non-resident persons earning UAE-sourced income can opt-out unless they have a nexus in the UAE.

Filing and Payment Deadlines:

• Corporate tax returns must be filed within nine months from the end of the financial year.
• Specific deadlines depend on the financial year-end.
• Failure to comply with the registration timelines will result in administrative penalties.

Examples:

• A business licensed in April 2020 must register by June 30, 2024.
• A business licensed in April 2024 has the same deadline of June 30, 2024.
• A business licensed in December 2023 must register by December 31, 2024.

The critical factor is the month of license issuance, not the year.

Elections Not to Be a QFZP

A QFZP does not qualify for certain features of the Corporate Tax regime due to the 0% Corporate Tax rate. For instance, a QFZP is not eligible for the 0% Corporate Tax rate on Taxable Income up to AED 375,000 offered to non-QFZPs. Additionally, a QFZP cannot participate in Tax Grouping or special relief programs like the transfer of Tax Losses, Small Business Relief, Qualifying Group Relief, and Business Restructuring Relief.

Conclusions

Businesses in UAE free zones must thoroughly review the FTA’s new Corporate Tax Guide for Free Zone Persons to ensure compliance and leverage the 0% corporate tax rate on qualifying income. Adhering to these criteria enables free zone entities to gain significant tax benefits, fostering their growth and supporting the UAE’s economic development.