Corporate Tax flash for Free Zone persons and companies: FTA’s new guidelines

The Federal Tax Authority (FTA) of the UAE has recently issued a comprehensive guide detailing the conditions under which businesses operating in free zones can benefit from a 0 per cent corporate income tax rate on their qualifying activities.

This clarification comes in the wake of the new federal corporate tax law, effective from June 1, 2023, which mandates a 9 per cent corporate tax rate on taxable income exceeding Dhs375,000, with specific exemptions for free zone entities.

Tax exemptions and conditions

• Qualifying Free Zone Person (QFZP) status:
  • Audited Financial Statements: Free zone entities must maintain audited financial statements.
  • Economic Substance: Companies must demonstrate substantial business operations within the free zone.
  • Qualifying Activities: Income must be derived from qualifying activities.
• Income Threshold for Non-Qualifying Income:
  • If non-qualifying income exceeds Dhs5m or 5 per cent of the overall income, the entity’s entire income may be disqualified from the 0 per cent tax rate.

The Federal Tax Authority has published a new Free Zone Persons, designed to provide general guidance on the application of the Corporate Tax Law to Free Zones and Free Zone Persons.#FTA #Federal_Tax_Authority#UAE#Corporate_Tax pic.twitter.com/z2XXxTd3HD

— Federal Tax Authority – الهيئة الاتحادية للضرائب (@uaetax) May 22, 2024

Clarifications on specific activities

• High Sea Sales: Income from high sea sales can benefit from the 0% tax rate.
• Domestic Billing for Export: Domestic sales billed to export outside the UAE mainland are considered qualifying.
• Cryptocurrency Investments: Investments in cryptocurrencies are also addressed under the qualifying income criteria.
• Interest Income: Interest income from surplus funds is non-qualifying.
• Holding Companies: Free zone holding companies with no employees can meet the substance test based on director decisions.
• Commodity Trading: Goods do not need to be traded on a commodity exchange to qualify, benefiting sectors such as oil, gas, gold, and agriculture.

Additional provisions

• Goods Processing: This is broadly defined and includes more than just manufacturing.
• Third Country Trading: Distribution activities involving third-country trading are eligible for tax benefits without physical import to the UAE.
• Investment for Personal Use: Investing excess cash for personal use is considered financing to related parties, thus qualifying as a qualifying activity.
• Financial Statements: QFZPs are not required to prepare separate financial statements for qualifying and non-qualifying income.

Corporate Tax compliance and registration

The Federal Tax Authority (FTA) recently announced new deadlines to register for corporate tax, significantly bringing forward the deadlines for businesses – in most cases more than a year earlier than originally indicated.

Instead of the previous deadline of September 2025 (for December tax year-end companies), the new staggered deadlines throughout 2024 require the first group of companies to be registered by May 31, with all companies to be registered by the end of December 2024.

With this new framework, the FTA has grouped businesses depending on the month in which their original licence was issued, regardless of the year of licence issuance.

• Registration Requirement:
  • All taxable persons must register for corporate tax with the FTA and obtain a Tax Registration Number.
  • Non-resident persons earning state-sourced income can opt-out unless they have a nexus in the UAE, necessitating registration.
• Filing and Payment Deadlines:
  • Corporate tax returns must be filed within nine months from the end of the financial year.
  • Different deadlines apply based on the financial year end of the business.

For example:

• A business which was issued its original licence in May 2018 now has a registration deadline of July 31, 2024.
• A business which was issued its licence in May 2023 also has a deadline of July 31, 2024.
• A business which was issued its licence in October 2019 has a registration deadline of November 30, 2024.

The point being illustrated is that only the month of licence issuance is taken into account – the year of issue is irrelevant.

Businesses operating in UAE free zones must carefully review the FTA’s latest guidelines to ensure compliance and take advantage of the 0 per cent corporate tax rate on qualifying income. By meeting the outlined criteria, free zone entities can significantly benefit from tax exemptions, supporting their growth and contribution to the UAE’s economic development.

For more detailed information on registration, exemptions, and filing processes, businesses are encouraged to consult the FTA’s comprehensive guide.

Read: UAE corporate tax: Deadline alert