Free zones in the United Arab Emirates attract investors and entrepreneurs from around the world due to tax advantages and opportunities for business development. However, the country's tax legislation has undergone some changes regarding the taxation of free zone companies.

Corporate Tax and Free Zones

From June 1, 2023, based on Federal Law No. 47 of 2022 "On the Taxation of Corporations and Businesses," the UAE introduced a corporate income tax for organizations. The law establishes a corporate tax rate of 9% for all companies, regardless of the form of ownership.

At the same time, free zones maintain a zero corporate tax rate for Qualifying Free Zone Persons (QFZP). To obtain QFZP status in a UAE free zone and enjoy preferential taxation, a company must fulfill several conditions, including:

• Maintain an adequate level of substance in the free zone;
• Receive certain qualified income;
• Not exceed turnover thresholds: unqualified income should not be more than 5 million dirhams or 5 percent of total revenue during the tax period;
• Not choose the general taxation system (9% on income exceeding 375,000 dirhams);
• Comply with pricing rules aimed at preventing sales at non-market prices between affiliated persons or companies;
• Provide audited financial statements.

Non-compliance with any of the conditions prescribed by law entails the loss of the status of a qualified free zone resident and the ability to apply a zero rate for five tax periods.

Tax Period and Filing a Return

All UAE free zone companies must register as taxpayers and obtain a taxpayer registration number.

Companies are required to file a corporate tax return for each tax period within 9 months from the end of the financial period.

The deadlines for registration and tax payment differ for companies depending on the start date of their financial year. Companies whose financial year began on January 1, 2024, must register as corporate income tax entities before September 30, 2025. The first tax period for such companies will end on December 31 of that year.

When deciding to start a business in the UAE, it is necessary to assess possible risks and consider the current requirements of the regulator. For consultation, contact the specialists at IT-OFFSHORE.