On 31 January 2022, the UAE Ministry of Finance announced that the federal corporate tax system will be implemented in the UAE, with effect for fiscal years starting from or after 1 June 2023. The UAE CT regime was designed to incorporate best practices from around the world and decrease compliance charges for businesses. The UAE, except for Bahrain, has a minimum corporate income tax rate of around 9%. Let us learn how UAE corporate taxes are applicable in UAE freezones. If you want external help, contact Fortius, which offers the best corporate tax services in the UAE.

A Brief Explanation of UAE Corporate Tax

Companies pay a corporate tax, a direct tax dependent on profit or net revenue. Corporate tax is also widely recognized as "Business Profits Tax" or "Corporate Income Tax." An effective Corporate Tax regime anchored on international best practices would bolster the UAE's position as a leading global center for investment and commerce and expedite the country's expansion and transformation to fulfill its goals and objectives. The emergence of a CT regime illustrates the UAE's determination to comply with global information-sharing standards and overcome harmful tax practices.

Corporate Tax Regime Applicability in the UAE 

The UAE has incorporated a federal tax structure that holds various activities taking place in the country. There are a few exceptional cases:

• Companies involved in the mining of natural resources. They will be subjected to Emirate tax decrees.
• Individuals can earn a living with their skills if the income source does not entail a commercial license.
• Businesses authorized in Free Trade Zones should meet every regulatory standard and refrain from doing business in the UAE mainland.

The recently launched corporate tax services have a three-tiered framework:

• All taxable profits until 375,000 AED will be levied at zero percent.
• All taxable profits outpacing 375,000 AED will be levied at 9%.
• A distinct tax rate is created for huge multinational corporations that fulfill specific conditions, in close agreement with OECD 'Pillar Two' of the Base Erosion and Profit Shifting plan. This relates to a multinational enterprise with a global profit of more than 750 million EUR.

A Detailed Insight on Tax Exemptions by Corporate Tax Services

Tax exemption for multinational companies shall apply in the following circumstances:

• A person's income earned through a job. Individuals will be liable to company tax when the wages are inferred from work performed under a permit or freelancing license.
• People investing in properties with their own potential, presuming no license is required.
• Capital gains and dividends derived from stock or asset ownership.
• Individuals can earn interest from savings plans and bank accounts.

Freezone Firms & UAE Corporate Tax 

UAE corporate tax services will apply to free zone businesses. The Corporate tax will keep the benefits accessible to freezone businesses that fulfill all regulatory measures and don't operate a business in the mainland of UAE. A company must sign up and document a CT return to function in a freezone. More data on the compliance obligations of freezone companies will be elaborated on below. The corporate tax requisite for businesses working in freezones will be consistent across all free zones.

Corporate Tax Services For Freezone Employees- All You Need to Know

The UAE CT government will recognize the tax benefits offered to freezone residents with corporate tax services as follows:

Also Read:Corporate Tax in the UAE and Which Categories Are exempted

Are residents of freezones excluded from UAE Corporate Tax?

No, a resident of a freezone is not excluded from UAE CT. A freezone person is liable to a zero percent CT rate. To receive these benefits, they must fulfill certain criteria. The requirements are as follows:

• Possess sufficient substance like office premises in the freezone
• Meet all regulatory requirements
• Submit tax returns and audited financial statements

What income qualifies freezone residents for a zero percent CT rate?

To qualify for the 0% rate, they must keep proper paperwork of accounts and systems and prepare financial statements every year. The three scenarios below help to comprehend taxability.

1. Individuals without a branch on the UAE mainland

A freezone person will be charged a 0% CT rate for money generated from the following activities.

• Businesses positioned outside UAE
• Specific financial services aiming at foreign markets
• Individuals located in a Value Added Tax Designated Zone
• Firms within the same Free Zone
• Companies from several other UAE freezones
• People receive passive income through interest, dividends, capital gains, and royalties.

2. Free zone residents with a branch on the UAE mainland

• Department income will be 9% CT rate
• Income from free zones will keep proceeding to be levied at a zero percent CT rate

3. Free zone residents conducting business with their business groups in the mainland

• Transactions between mainland UAE companies and freezone people are subject to a 0% CT rate.
• Payments made to freezone Individuals by their mainland business groups are not deductible expenses for the mainland companies.

Is there any additional requirement for claiming a 0% CT rate as a freezone individual?

Yes, the other conditions are as follows:

• The freezone person must file its CT return by the due date.
• Financial statements must be audited.

Endnote

Many companies in the UAE have multiple branches or subsidiaries. Some are in the freezones, while others are on the mainland. To do business both inside and outside the UAE, these companies frequently conduct inter-company transactions. A freezone person should examine and assess their commercial transactions and operations. Even minor transactions can have an unjustified impact on tax liability. Companies' ownership structures may need reconsidering to benefit intra-group asset transfers. Get in touch with Fortius Consulting Services, one of the best business consulting and CFO services in UAE, if you want to know more about freezone tax details.