For years, the United Arab Emirates (UAE) has been recognised for providing a tax-free environment that attracts businesses and entrepreneurs from around the world. That changed with the introduction of a federal corporate tax, and many are now wondering, does the UAE still offer the same advantages?
The answer depends on how your business is structured, where it operates, and what type of activity it undertakes. Despite the new tax regime, companies that meet specific criteria can still benefit from a zero per cent tax rate. If you are running or planning to set up a company in a UAE free zone, this article breaks down what you need to know.
Why did the UAE introduce Corporate Tax?
The UAE introduced a 9% corporate tax on business profits exceeding AED 375,000. This move took effect on June 1, 2023, with enforcement starting on January 1, 2024,.
The purpose behind this change is clear. The UAE is aligning with international tax standards and responding to increasing global pressure for transparency. It is also seeking to diversify national revenue sources away from oil. Despite the introduction of CIT, the UAE’s 9% rate is still among the lowest internationall
What is a UAE Free Zone company?
Free zones are designated areas in the UAE designed to attract foreign investors by offering streamlined company formation processes, full foreign ownership, and favourable tax treatment. There are more than 40 free zones across the country, including in Dubai, Abu Dhabi, Sharjah, and Ras Al Khaimah.
Companies in free zones can be registered as:
- Free Zone Establishments (FZE) with one shareholder
- Free Zone Companies (FZC) with two or more shareholders
Free zone companies do not require their owners to reside in the UAE. However, in most cases, a general manager and a bank signatory must hold a residency visa of the UAE.
Who pays Corporate Tax in the UAE?
The corporate tax applies to:
- UAE-registered companies
- Foreign businesses with a permanent establishment (PE) in the UAE
- Foreign companies that are effectively managed and controlled from the UAE
- Individuals earning income from business or professional activities under a UAE commercial license
Personal income from employment, investments in personal capacity, or real estate not conducted under a license are not subject to Corporate tax.
Exemption threshold
Under the small business relief threshold, businesses with revenue equal or below to AED 3 million in a tax period and all previous tax periods can elect an elect to be treated as having no Taxable Income in that period and will not be obliged to calculate its Taxable Income and only need to complete a simplified Tax Return.
Businesses with taxable profit below AED 375,000 are taxed at 0%.
Understanding Qualifying Free Zone Persons
Not every company in a free zone automatically qualifies for tax exemptions. To benefit, a company must meet the criteria of a Qualifying Free Zone Person (QFZP). A Qalifying free zone person are taxed at 0% on qualifying income and 9% on non-qualifying income.
This means:
- Having sufficient presence in the UAE, including office space, staff, and operating expenses
- Conducting approved or qualifying activities
- Earning a qualifying income
- Complying with financial reporting and transfer pricing rules
From the first financial year, companies that want to maintain Qualifying Free Zone status must also submit audited financial statements within nine months after the end of each tax period.
What counts as qualifying income?
Qualifying income includes transactions with other free zone entities and specific approved activities. These include:
- Manufacturing or processing goods
- Holding company operations
- Fund and wealth management
- Logistics services
- Leasing or financing of aircraft
- Certain intellectual property activities
If your income comes from these activities, and your customers are based in other free zones, you may still qualify for the 0% tax rate.
What does not qualify?
Excluded activities include:
- Dealing directly with individuals (retail and services to the public)
- Banking and insurance services
- Real estate development or property management
- Non-qualifying intellectual property royalties
Companies that engage in these activities or earn income from outside the free zone may be taxed at 9% unless their non-qualifying income falls under the deminimis rule. A free zone company can still be treated as qualifying if its non-qualifying income does not exceed AED 5 million or 5 per cent of total revenue, whichever is lower. Exceeding this threshold may result in the company losing its tax-exempt status.
Understanding the UAE’s corporate tax system and navigating the regulations of free zones can be complex. That’s where C2Z Advisory comes in. Our team works closely with entrepreneurs, startups, and established businesses to help them stay compliant while leveraging the UAE’s business-friendly environment to their advantage.
We assist with:
- Company formation in the correct free zone
- Tax advisory and structuring
- Preparing and filing audited financial statements
- Ongoing accounting and compliance support
- Evaluating whether your business qualifies for 0 per cent corporate tax
Whether you’re planning to launch a new venture or reviewing your existing setup, C2Z Advisory can help you stay ahead of the curve.
Although the UAE may no longer be completely tax-free, it still offers significant advantages for businesses. If you want to make the most of the new UAE corporate tax landscape, reach out to C2Z Advisory. We’re here to simplify the process, keep your business compliant, and help you succeed.
