Benefits of Filing Corporate Tax for Free Zone Entities
UAE Federal Tax Authority (FTA) implemented Corporate Tax with effect from June 1st, 2023. Free Zones are specially designated areas that offer various tax benefits for businesses operating for investment and economic growth. There were several misunderstandings related to Corporate Tax registration such as there is no need to register for Corporate Tax if no taxable income, it is applied to large entities, Free Zone persons are not required to register due to 0% Corporate tax, maintaining financial records isn’t mandatory etc. It is important to clarify all the misconceptions about the Corporate Tax Regime to stay compliant.
Today in this blog, we will focus on the corporate tax applied to Free Zone persons. How businesses can achieve maximum tax benefits while complying with tax regulations?
What is a Free Zone Entity?
Companies registered and licensed in UAE-designated areas are referred to as Free Zone entities. Mainly, businesses operating in a Free Zone can focus on maintaining their financial growth. There are certain features associated with it including-
- 100% foreign ownership: Full ownership by foreign investors without the need for a local partner.
- Tax benefits: Enjoy 0% corporate tax on qualifying income.
- Strategic locations: International trade is easy as most of the Free Zones are near ports, airports and logistics hubs
- Competitive business environment: Free Zone entities benefit from tax relief can attract profits in their business and also explore reinvestment opportunities.
Are you eligible for a 0% corporate tax rate?
In order to check if a Free Zone entity is eligible for a 0% Corporate Tax rate or not, there are a few conditions which include-
1. Maintain adequate substance in a free zone:
The entity must maintain adequate resources to support business operations and activities such as full-time employees, operation expenditure and maintaining physical office space.
2. Qualifying income:
- Income generated with other Free Zone persons must involve the beneficial recipient and cannot include Excluded activities.
- Income from qualifying activity, must not include Excluded activities.
- Free Zone entity must not have elected to be subject to the Standard Corporate Tax rules and rates.
- Must comply with Arm’s Length principle and maintain transfer pricing documentation.
- Maintain audited financial statements.
- Non-qualifying revenue must meet the de-minimis requirements.
Is it mandatory for Free Zone entities to file corporate tax?
Every Free Zone company whether it is a small or large firm, has to register for corporate tax and file a return as per the UAE regulations, irrespective of the 0% corporate tax rate.
Filing requirements under corporate tax law include-
- Corporate tax registration: It is compulsory for every business in Free Zone to register for corporate tax and collect a Tax Registration Number (TRN) from FTA.
- Annual corporate tax return filing: Every business in Free Zone must file a Corporate Tax return within 9 months of the end of the financial year, even if their taxable income is 0%.
- Audited financial statements: The most crucial step is to maintain and submit the audited financial statements as per the International Financial Reporting Standards (IFRS).
- Economic substance reporting: The Free Zone companies must report that they have adequate economic substance such as office space, qualified and full-time employees and core-income generating activities.
- Segregation of Qualifying and Non-qualifying Income: It is very important for businesses to determine both incomes correctly. Qualifying income will be subject to a 0% corporate tax rate, on the other hand, non-qualifying income will be subject to a 9% corporate tax rate.
- Record keeping: Accurate financial records must be maintained for at least 7 years from the end of the relevant tax year in support of compliance regulations.
What are Qualifying Income and Non-Qualifying Income?
Qualifying income
Qualifying income refers to the income generated by the Free Zone entity by performing the qualifying activity. There are certain conditions set by FTA for the free zone person to qualify for 0% corporate tax rate. The conditions are as follows-
- Any income generated within the same or other free zones is considered as qualifying income.
- Income earned from qualifying activities such as manufacturing and processing, logistics, holding intellectual property, and certain financial services.
- Incomes generated from Qualifying Intellectual Property
Non-Qualifying income
Income that does not meet the conditions of qualifying income, comes under non-qualifying income. Non-qualifying income for free zone entities can be demonstrated by the following example-
- Transactions where Arm’s Length principle and transfer pricing rules are not maintained as required.
- Income generated from non-qualifying activities
Common Challenges for Free Zone Entities
It is quite challenging for the free zone entities to understand every minor and complex detail to qualify for a 0% corporate tax rate. To enjoy tax benefits, they must have complied with the regulations. Here are some of the challenges faced by the businesses-
- Differentiating incomes: Understanding and differentiating qualifying income and non-qualifying income is a complex process. Unable to recognize correctly can lead to incorrect tax filings and penalties.
- Adequate economic substance requirements: Adequate substance requirements must be met to showcase the physical presence, full-time employees and core operations. If failed to maintain economic substance, it can lead to disqualification from a 0% corporate tax rate.
- Transfer pricing compliance: International transactions with the related party must comply with the transfer pricing rules.
- Accurate tax filings: Free Zone entities must file corporate tax returns annually even if they are qualified for a 0% corporate tax rate to stay compliant and avoid penalties.
How Flying Colour Tax Consultant LLC Can Help?
As a business owner, it is important to understand the basic requirements for your business to comply with UAE regulations. However, tax compliance can be critical for any company that doesn’t have much knowledge about laws. We at Flying Colour Tax Consultant LLC, have a maker and checker system so that you fully comply with the updated tax rules and regulations while focusing on your core business activity and growth.
Our services include-
- Corporate tax advisory and return filing
- Auditing and accounting services
- VAT and customs support
- Economic substance requirements
- Transfer pricing advisory
- Tax planning and risk management
Our expert team will take good care of your tax requirements and maximise the tax benefit for you.
Conclusion
We have learned so far that there are certain conditions for the Free Zone entities to be qualified for a 0% corporate tax rate. There are strict regulations while filing returns, maintaining adequate substance and transfer pricing rules.
It would be advisable to contact a professional who can handle your complex tax compliance and advisory needs.
To learn more about Corporate Tax for Free Zone Entities: Filing Requirements and Benefits, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.