A Quick Guide to Corporate Tax on Mainland and Free Zones

Are you considering starting a business in UAE but unsure where to set it up? You may be confused about whether to choose Mainland or the Free Zone.?Corporate tax?is an essential component of business operations in the UAE, and it is vital to understand the differences between corporate tax for Mainland UAE and?corporate tax for Free Zones in UAE. Mainland businesses and Free Zone businesses have varying tax rates and rules, and it's crucial to understand them to avoid penalties and legal issues. This blog will guide you on applying the corporate tax to Mainland and Free Zones in UAE.

Corporate Tax Regime Features

Who will be taxed in UAE?

Legal entities such as LLCs, PSCs, PJSCs, LLPs and other companies with legal personalities will be taxed. Foreign companies earning income in UAE and are tax residents will also be taxed. Free Zone companies are exempted from corporate taxes if they comply with regulations. However, Free Zone companies involved in trading with mainland companies will be taxed. Both UAE residents and non-residents may be subject to corporate taxes.

Tax rates

In UAE, businesses earning less than AED 375,000 will not be taxed, while those earning more will be charged a 9% tax. Larger multinational companies with different business conditions may be charged a different tax rate.

Who is exempt from corporate tax in UAE?

Charities, public benefit organizations, investment funds, companies engaged in oil and resource extraction, and wholly government-owned companies are?exempted from corporate tax. In addition, there is a participation exemption from corporate tax for receiving dividends or selling shares of a subsidiary company.

What are the conditions to get a 0% tax rate in UAE?

Corporate tax for Free Zones in UAE varies based on the type of business activity. Free Zone Persons can avail of a 0% corporate tax rate on income earned from transactions with businesses outside UAE or from trading with businesses within the same or any other Free Zone. However, if Free Zone companies engage in business activities with mainland businesses, they will be subject to corporate tax on the revenues generated.

What will be the tax rate for a Free Zone Person with a mainland branch in UAE?

The income earned by a Free Zone Person from its mainland business activities will be subject to the regular corporate tax rate if it has a branch in the UAE mainland. However, if the Free Zone Person maintains separate books of account for its mainland and Free Zone business activities, it can continue to enjoy the 0% corporate tax rate on its Free Zone income. But if there are no separate books, then the 9% tax rate will apply to both Free Zone and Mainland income.