UAE's Finance Ministry issues corporate tax exemptions for free zones

Companies will benefit from zero per cent tax rate on income related to certain activities and transactions

Younis Haji Al Khoori, undersecretary in the Ministry of Finance, speaks during a press conference on corporate tax rules for free zones. Victor Besa / The National

The UAE's Ministry of Finance has given new details of corporate tax for businesses operating within the country's free zones after the Gulf nation introduced the tariff on June 1.

Companies operating in free zones can pay zero per cent tax on income from certain qualifying activities and transactions, officials from the Ministry of Finance said in Abu Dhabi.

A qualifying company can benefit from zero per cent corporate tax rate on qualifying income provided it is incorporated, established or registered in a free zone.

It can also benefit from a tax exemption on income earned from transactions with mainland UAE businesses or those in a foreign jurisdiction.

Qualifying activities include fund, wealth and investment management services, the manufacture and processing of goods or materials, reinsurance services, the holding of shares and other securities and the ownership, management and operation of ships.

Other qualifying activities include services provided by headquarters to related parties, Treasury and financing services provided to related parties, the financing and leasing of aircraft (including engines and rotable components), logistics services, as well as distributions in or from a designated zone that meet the relevant conditions and any ancillary activities related to these.

Businesses can contact their free zone authority to confirm whether their free zone is eligible for the zero per cent rate.

Asked if the new rules will compel more businesses to move from the mainland to free zones, Shabana Begum, executive director of the tax policies sector, said the laws were designed to further promote the country's attractiveness in strategic sectors.

The corporate tax laws – which levy a headline 9 per cent rate on income of certain businesses that exceed Dh375,000 ($102,000) – reflect the UAE's efforts to pursue non-oil growth, diversify its economy, boost its revenue base and reinvest funds in strategic projects, Younis Al Khoori, undersecretary of the Ministry of Finance, told reporters.

The move to introduce corporate tax will help the Arab world’s second-largest economy broaden its revenue base and achieve its economic growth objectives.

The move will increase the country's taxation scope beyond VAT and different custom duties, as well as complement the government's efforts to diversify its economy from oil, analysts say.

The UAE has about 40 free zones across the country, the Ministry of Economy website says. The zones, where expats and foreign investors benefit from100 per cent ownership of companies, attract billions of dollars of investment for the Middle East's trade hub.

On Thursday, the Ministry of Finance released two new decisions pertaining to corporate tax and companies operating in free zones. Cabinet Decision No. 55 of 2023 explained the scope of qualifying income. Ministerial Decision No. 139 of 2023 addressed qualifying activities and excluded activities.

Qualifying income is defined as income from transactions with other free zone entities, as well as domestic and foreign-sourced income derived from conducting any of the qualifying activities.

This is except for income from excluded activities.

Excluded activities are transactions with natural persons; regulated banking, insurance, financing and certain leasing activities; ownership or use of intellectual property assets and ownership or use of UAE immovable property.

Earning income from excluded activities or earning any other income that is not a qualifying income will result in the free zone company being disqualified from the corporate tax regime, subject to "de minimis requirements", the ministry said.

The de minimis requirements allows a qualifying free zone person to earn a small or incidental amount of non-qualifying income without being disqualified from the free zone corporate tax regime.

The de minimis requirement is met where the non-qualifying revenue earned by a qualifying free zone company does not exceed the lower of either 5 per cent of their total revenue or Dh5 million.

It is calculated by dividing total non-qualifying revenue by total revenue.

The Cabinet decision also clarified that a qualifying free zone company must maintain "adequate substance" in the UAE.

Adequate substance requirements mean that the core-income generating activities of a qualifying company must be performed in the free zone. These activities can be outsourced to a related party or third party located in the free zone.

The Cabinet did not set a minimum level of substance.

Key takeaways

• Companies operating in free zones can benefit from zero per cent tax on income from certain qualifying activities and transactions
• A qualifying company can benefit from zero per cent corporate tax rate on qualifying income provided it is incorporated, established or registered in a free zone
• Qualifying activities include manufacturing; reinsurance services; the holding of shares and other securities; the ownership, management and operation of ships; and fund, wealth and investment management services that are subject to UAE regulatory oversight
• They also include treasury and financing services; financing and leasing of aircraft, including engines and rotable components; and logistics services
• To be subject to the zero per cent tax, the non-qualifying revenue earned by a free zone entity must not exceed the lower of either 5 per cent of their total revenue or Dh5 million
• If the requirements are not met, the free zone entity will not be able to benefit from the free zone corporate tax regime for a minimum period of five years
• Businesses can contact their free zone authority to confirm whether their free zone is eligible for the 0 per cent rate.