Introduction – Chapter 5 – Free Zone Persons under the UAE Corporate Tax Law
Free Zones, referred to as Free Trade Zones, are created to facilitate single-window- administration for the convenience of foreign investors while promoting global trade. Free Zones in the UAE are either associated with ports or are industry specific. The UAE has long been a hub for international business, and with the new Corporate Tax Law, as the nation’s economy has grown, so has its connection to the UAE community’s culture of entrepreneurship.
This chapter of the UAE Corporate Tax Law deals with the taxability of Free Zone Persons. Free Zone Person is a Qualifying Free Zone Person who is eligible to pay Corporate Tax at the rate of 0% on their “Qualifying Income”.
Article 18 – Qualifying Free Zone Person under the UAE Corporate Tax Law
A Free Zone is a defined or designated geographical area which is specifically mentioned under the Cabinet’s decision on the suggestion of the Minister of Finance. Thus, the power lies with the Cabinet to designate a particular area in the territory of UAE as a Free Zone.
A Free Zone Person is a juridical or legal person that is:
- Incorporated in the Free Zone, or
- Established in the Free Zone, or
- Registered in the Free Zone
It also includes a branch of a Non-Resident registered in Free Zone.
A Free Zone Person, whether it is a Qualifying Free Zone Person or not, is required to register and file for the Corporate Tax Return.
Conditions to be fulfilled by a Free Zone Person to qualify as a Qualifying Free Zone Person under the UAE Corporate Tax Law
A Free Zone Person that satisfies all the conditions of a Qualifying Free Zone Person be eligible to benefit from 0% corporate tax rate, under Article 3(2)(a) on their Qualifying Income.
Thus, a person would be considered as a Qualifying Free Zone Person, if he/she satisfies all the following conditions –
- Maintain Adequate Economic Substance in UAE: It should ensure that there is sufficient economic substance in the UAE.
- Derives Qualifying Income: It should receive Qualifying Income as is defined in the Cabinet’s decision made on the Minister’s recommendation.
- No Election Made: It has not elected to be subjected to the Corporate Tax provisions under Article 19 of the UAE Corporate Tax Law.
- Complies with Articles 34 (Transfer Pricing Rules) of the UAE Corporate Tax Law, and
- Complies with 55 (Maintaining Transfer Pricing Documentation) of the UAE Corporate Tax Law.
- Complies with any additional requirements that the Minister may impose.
When does a Person cease to be a Qualifying Free Zone Person?
Any person not fulfilling the conditions (mentioned in Article 18 of the UAE CT Law) in a particular Tax Period shall cease to be a Qualifying Free Zone Person from the beginning of that Tax Period under the UAE Corporate Tax Law.
Authority of Minister to specify certain conditions or circumstances
The Minister may specify the criteria and circumstances under which a Person:
- May continue to be a Qualifying Free Zone Person, or
- Cease to be a Qualifying Free Zone Person from a different date.
Applicability of Corporate Tax Rates for Qualifying Free Zone Person
- Application of Article 3(2)(a): A Qualifying Free Zone Person is subject to Article 3(2)(a) of the Corporate Tax Law I.e., 0% Corporate Tax on its income for the remainder of the tax incentive period in which the Qualifying Free Zone Person is registered.
- Extension of Period by Cabinet: This period may be extended in accordance with any conditions as may be determined in a decision issued by the Cabinet at the suggestion of the Minister.
- Limit on maximum extension: However, it must be noted that any one period, so extended, shall not be more than fifty (50) years.
Article 19 – Election by a Qualifying Free Zone Person to be Subject to Corporate Tax under the UAE Corporate Tax Law
A Qualifying Free Zone Person may elect to be subject to Corporate Tax at the normal rates under the UAE CT Law. I.e., it may elect to have its Qualifying Income be treated as Taxable Income.
Effective Date: The election shall be made take effect either at:
- The beginning of the Tax Period in which the election is made by the Qualifying Free Zone Person; or,
- The beginning of the Tax Period subsequent to the Tax Period in which the election was made.
Does your business entity qualify as a Qualifying Free Zone Person under the UAE CT Law?
