Detailed Breakdown of SME Relief in UAE Corporate Tax: Mainland vs. Free Zones

The UAE's corporate tax regime introduced in June 2023 offers relief for Small and Medium Enterprises (SMEs). However, the specifics differ between companies operating in the UAE mainland and those within Free Zones. Here's a closer look:

Mainland SME Relief - Small Business Relief Regime (SBRR)

Eligibility:

• Turnover Threshold: Your company's annual turnover for the current and previous tax period must be below AED 3 million (around USD 816,000). This threshold is subject to change in the future, but currently applies until December 31st, 2026.
• Not a Qualifying Free Zone Person (QFZP): Companies that benefit from the Free Zone corporate tax exemption (explained below) are not eligible for the SBRR.
• Not Part of a Large Multinational Group: Companies belonging to multinational groups with a consolidated group revenue exceeding AED 3 billion are ineligible.

Benefit:

• Mainland Companies meeting the criteria can elect for the SBRR. This essentially exempts them from paying any corporate tax on their entire taxable income.

Process:

• To claim the SBRR benefit, companies need to formally elect for it during the tax registration process or by submitting an amendment to their existing registration.

Free Zone SME Relief - Qualifying Free Zone Person (QFZP)

Eligibility:

• Free zone companies cannot directly benefit from the mainland SBRR program.
• However, they can achieve a similar tax advantage by obtaining the Qualifying Free Zone Person (QFZP) status.
• The specific requirements to become a QFZP vary depending on the Free Zone authority, but generally involve:
• Physical Presence and Substance: Demonstrating a physical office and operational activities within the Free Zone. This may include employing staff, having proper bookkeeping, and conducting business meetings there.
• Transfer Pricing Compliance: Following UAE regulations on transfer pricing, which ensure transactions between related entities (e.g., a Free Zone company and its parent company) are conducted at arm's length (fair market value).
• Not Electing for Full Corporate Tax: Free Zones typically offer a 0% corporate tax advantage. Companies seeking QFZP status cannot opt for the full 9% corporate tax regime.

Benefit:

• QFZPs pay 0% corporate tax on their "Qualifying Income." The exact definition of Qualifying Income is still under clarification by the authorities, but it's expected to exclude certain types of income, such as mainland UAE-based sales or passive income (e.g., dividends).
• QFZPs will still be subject to the standard 9% corporate tax on any income that doesn't qualify as Qualifying Income.

Key Differences & Considerations:

• Mainland relief is simpler and more straightforward - Companies with a turnover under AED 3 million are completely exempt from corporate tax.
• Free Zone relief requires additional effort - Obtaining QFZP status involves meeting specific criteria and adhering to ongoing compliance requirements.
• Free Zone relief may not be a complete exemption - It only applies to a specific type of income (Qualifying Income). Businesses with a significant portion of their income derived from mainland UAE sales might end up paying some corporate tax.

Choosing the Right Option:

The best option for your company depends on your specific business model and future plans.

• For businesses primarily focused on mainland UAE operations or with a turnover below AED 3 million, mainland incorporation with SBRR might be ideal.
• For businesses looking to leverage Free Zone benefits like ease of setup, foreign ownership, and specific industry clusters, obtaining QFZP status could be a good option, especially if most of their income is derived from outside the UAE mainland.

It's important to consult with a tax advisor to understand the intricacies of the UAE corporate tax system and determine the most suitable approach for your company. They can help you navigate the specific Free Zone regulations and ensure you meet the QFZP requirements.