As corporate tax was launched in the UAE on June 1, a couple of long-awaited decisions on free zones were released.
One was a Cabinet decision while the other was a ministerial one.
It is important to understand that these decisions are pieces of a larger whole. They must be read in the context of other pieces of information already released. Any elements not specifically documented may be detailed in a future release, with many more expected.
Finally, these decisions were issued by different government bodies: The Cabinet, the Finance Ministry and the Federal Tax Authority.
Do we now have a definitive position on free zones and corporate tax? No.
Here is what we have learnt, alongside some implications and questions you should be considering.
The original guidance from 2022 – that said zero per cent corporate tax would apply to free zone entities if no onshore trading was conducted – has been qualified quite extensively.
These qualifications are in the form of activities. Those on the list that are not excluded are considered qualifying income. This means that no corporate tax is payable on them.
Conversely, those activities that are excluded will attract corporate tax. The list is not exhaustive, which brings us to this working example from VAT.
Established frameworks can be useful in shaping our thinking.
In the aviation sector, direct costs (fuel) and secondary supporting costs (parts for repairs) that ensure an aircraft can operate are zero per cent for VAT purposes. Tertiary costs are standard-rated.
The line between secondary and tertiary costs can sometimes be grey and open to debate.
The implication is that making a treatment decision one way or the other can affect formal reported numbers for money that is due.
While further official releases will provide clarification, keep the following factors in mind.
The UK introduced its first nationwide tax in 1798 and to this day, there continues to be a series of cases seeking to clearly define the treatment of a particular aspect of an ever-evolving tax law regime.
Are you as an organisation planning on being conservative? Where some doubt may exist in interpreting on what side of the fence a particular stream of revenue is, which column will you count it in?
To be clear, as a qualifying free zone person, the decision I lay out above is whether to opt in for corporate tax or not.
If you decide to pay 9 per cent corporate tax on your taxable profits, the warren of possibilities instantly disappear.
If you are a qualifying free zone person trading with another qualifying free zone person in a clearly defined non-excluded activity, then you can elect to opt out of corporate tax.
What happens if your customer is a non-free zone person but the activity is a qualifying activity? Then the revenue is also qualifying revenue and corporate tax is zero per cent.
Staying with a customer who is a non-free zone person, this is where it gets interesting.
Should the activity be non-qualifying, but below a “de minimis” level, that revenue can still be qualifying income and corporate tax remains at zero per cent.
Does this mean I can do some trade onshore? It would appear so, but there are limits.
The revenue must be no more than 5 per cent of total revenue or the value of this number cannot exceed Dh5 million. The lower of the two is the tested number. This relates to a single reporting period.
There are two additional elements that are critical here.
If the “de minimis” level is breached, then an entity loses its qualifying free zone person status for the tax year in question. Additionally, it loses it for the next four tax years.
The greater issue to consider is a post-reporting change of treatment of revenue or a clarification that changes the nature of your revenue, which results in a failed “de minimis” test after the fact.
There will almost certainly be procedures for those that need to restate their reported tax computation.
It occurs in statutory financial reporting all the time. As of now, we do not know what this will involve and what penalties may be imposed.
Unlike VAT, no guidance has been issued relating to penalties.
UAE introduces corporate tax from June 2023 – in pictures
One final thought. An entity that freely chooses to opt out of the free zone exemption for corporate tax cannot opt back in at a future time. It is a one-way journey.
Should an entity lose its qualifying free zone person status, does this mean that they are not considered to have opted out and may, after the period of suspension served, continue to choose whether or not to opt out?
Staying alert and studying the official decisions of authorities has never been more important for your organisation.
David Daly is a partner at the Gulf Tax Accounting Group in the UAE
Timeline
2012-2015
The company offers payments/bribes to win key contracts in the Middle East
May 2017
The UK SFO officially opens investigation into Petrofac’s use of agents, corruption, and potential bribery to secure contracts
September 2021
Petrofac pleads guilty to seven counts of failing to prevent bribery under the UK Bribery Act
October 2021
Court fines Petrofac £77 million for bribery. Former executive receives a two-year suspended sentence
December 2024
Petrofac enters into comprehensive restructuring to strengthen the financial position of the group
May 2025
The High Court of England and Wales approves the company’s restructuring plan
July 2025
The Court of Appeal issues a judgment challenging parts of the restructuring plan
August 2025
Petrofac issues a business update to execute the restructuring and confirms it will appeal the Court of Appeal decision
October 2025
Petrofac loses a major TenneT offshore wind contract worth €13 billion. Holding company files for administration in the UK. Petrofac delisted from the London Stock Exchange
November 2025
180 Petrofac employees laid off in the UAE
Ten tax points to be aware of in 2026
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
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6. Further transfer pricing enforcement
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Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
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