The UAE has long been known as a top destination for businesses looking to gain strategic advantages, thanks to its extensive network of over 50 free zones. These free zones have historically offered attractive incentives such as tax holidays and customs duty exemptions, making them a highly competitive option for companies in the global market. Traditionally, businesses in UAE free zones enjoyed tax holidays of up to 50 years, along with exemptions from customs duties and other benefits like full foreign ownership and repatriation of capital and profits. However, the introduction of Federal Decree-Law No. (47) of 2022 marked a significant change, introducing corporate tax for all taxable persons, including those in free zones.
With the new corporate tax law, businesses in UAE free zones can still benefit from preferential tax rates by meeting specific criteria to qualify as a qualifying free zone person (QFZP). This includes demonstrating economic substance within the free zone, deriving qualifying income, adhering to transfer pricing rules, and maintaining audited financial statements. Qualifying income for a QFZP comes from specific activities such as selling goods or services to other free zone entities, which can still enjoy a zero per cent corporate tax rate on the generated income. Additionally, businesses in free zones can benefit from a zero per cent tax rate on income from transactions with non-free zone entities if it arises from qualifying activities like manufacturing, trading, investment holding, ship management, and certain financial and logistical services.
Entities in UAE free zones that secure QFZP status will be subject to a zero per cent tax rate on qualifying income and a nine per cent tax rate on non-qualifying income. All entities, whether qualifying or non-qualifying, must register for corporate tax and comply with mandatory return filing requirements. While free zones in the UAE no longer offer total immunity from corporate taxes, they still provide significant benefits for businesses, including preferential tax rates, customs exemptions, and operational advantages. By staying compliant with the new regulations and meeting the conditions for QFZP status, businesses can continue to take advantage of the benefits that free zones offer in the evolving corporate tax regime.
In conclusion, businesses in UAE free zones can still benefit from preferential tax rates and other advantages by meeting the criteria for QFZP status. Despite the introduction of corporate tax, free zones continue to be a competitive option for companies looking to establish a presence in the UAE market. It is essential for businesses to stay updated on the changing regulations and requirements while leveraging the opportunities that free zones provide. As the corporate tax regime evolves, businesses can continue to thrive in the UAE by taking advantage of the benefits offered by free zones.
