UAE Free Zones Launch Special Corporate Tax Rates

Overseas businesses that plan to launch in the UAE are not waiting for complete updates on corporate tax before taking up free zone licenses. Instead, they are signing up as UAE free zones offer some of the most compelling rates and incentives to businesses that sign up now. The first quarter had witnessed increased intakes of new licensed businesses by most of the big free zones in the UAE, with many businesses also considering UAE mainland operations.

Industries that have shown the biggest interest in seeking new licenses include those dealing with crypto, fintech, digital tech, and industrial activities. Competition to attract businesses to free zones is tough; however, free zones have already reduced their costs in recent years to remain competitive. Thus, many clients are opting for mainland set-ups with 100% ownership as it offers significant benefits including lowered formation costs, transparent business setup costs, fewer office rents, compliance with other mainland clients, and the ability to be 100% foreign-owned now for most mainland UAE activities.

The UAE’s decision to allow 100% ownership without a UAE National sponsor has opened up a lot of possibilities and more so for new entrants launching operations. The other significant factor in the free zone license vs. mainland one is corporate tax. A free zone enterprise will be exempt from the 9% tax if they comply with a prescribed set of requirements. If they do not and derive extensive income from mainland operations, then the 9% corporate tax kicks in.

This is where “qualifying income” comes in, which the UAE’s corporate tax laws describe as income derived by a free zone entity from any transactions it may have with businesses outside of the UAE, another enterprise based in the same free zone, or one of the UAE’s 40 odd free zone clusters. This qualifying income will be taxed at zero percent; however, businesses must await the UAE cabinet’s decision for more guidance on this matter.

Where part of a free zone business’s revenue (say 20%) is from UAE mainland entities, then the balance would be considered as qualifying income, according to Atik Munshi, Managing Partner at Finexpertiza UAE, a consultancy. The business would have to justify and allocate the relevant expenses toward such qualifying and non-qualifying to the satisfaction of the FTA (Federal Tax Authority).

Thus, free zone businesses need to watch this space closely. If they are conducting any operations on the mainland, they need to be wary of subjecting their free zone operations to corporate tax. Companies are, therefore, looking at their overall structure and potentially considering setting up in the mainland where required – either a branch, subsidiary or a completely new entity.