CORPORATE TAX IN UAE - FREE ZONE PERSON

CORPORATE TAX IN UAE - FREE ZONE PERSON

UAE has a number of Free Zones across its various Emirates. Free Zones are known as Economic Zones in some countries and some territories call them as Free Trade Zones. In general, these special zones have been created by government to provide trade benefits and to promote foreign investments. The main purpose of creation of Free Zones is to avoid the complications in international trade and the duties imposed by customs. There are various other benefits enjoyed by Free Zones in UAE. In this section we are going to discuss about a Free Zone Person from Corporate Tax point of view and how they are different from other Taxable Persons.

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Qualifying Free Zone Person

A Juridical Person incorporated, established or otherwise registered in a Free Zone is called as a Free Zone Person. It also includes a branch of a Non-Resident Person registered in a Free Zone. Free Zone Persons eligible for Zero percent (0%) Corporate Tax on their income are known as Qualifying Free Zone Persons.

Article 18 of Decree law states that Qualifying Free Zone Person is a Free Zone Person that meet all the conditions mentioned below:

1.????Maintains adequate substance in UAE.

The company must have a physical presence in Free Zone rather than in just papers. There is no clarity with respect to ‘adequate substance’ in the Decree Law. However, it usually means a physical office with adequate number of employees and physical assets in the state.

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2.????Comply with UAE Transfer Pricing Provisions.

Free Zone Persons are required to comply with the Transfer Pricing provisions under Article 34 and Article 55 of the Decree Law and this will be covered in the topic ‘Transfer Pricing’ in detail.

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3.????Derives Qualifying Income as specified in cabinet decision.

Federal Tax Authority has not defined the ‘Qualifying Income’ in the Decree Law. The cabinet decision regarding the Qualifying Income is expected in the coming days.

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4.????Has not elected to be subject to Corporate Tax.

Free Zone Persons have an option to be taxed at standard Corporate Tax rates if they make an election as discussed under Article 19. The person has to make sure that no such election has been made, in order to get the preferential rate of 0%.

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A Qualifying Free Zone Person who fails to meet any of the above condition during a financial year shall cease to be a Qualifying Free Zone Person and as a result they are subject to Corporate Tax at standard rate (i.e. 9%) like any other taxable person from the beginning of the financial year in which the person fails to meet the conditions.

Moreover, Free Zone Persons are subject to normal Corporate Tax rates, when the person at his own will makes the election as per Article 19. As a result of the election all the income of a Free Zone Person would be taxed at standard rate of 9%. The election shall be effective from either of the commencement of the Tax Period in which the election is made or the commencement of the following Tax Period.

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