Freezone VS Mainland – UAE Corporate Tax Updates

Do you have a business in UAE? Or are you planning to set up a business? But confused about where to set up. Mainland or Free zone?

The Corporate Tax Law will come into effect in UAE from 1 June 2023 with a headline rate of 9%.

What does it mean for free zone Entities? Well, they are entitled to a 0% tax rate upon meeting certain conditions.

What are the conditions avail a 0% tax rate?

A Free Zone Person is entitled to a 0% corporate tax rate on income earned from transactions with businesses located outside of the UAE, or from trading with businesses located in the same or any other Free Zone.

If free zone companies do business with mainland businesses, they will normally have to pay the corporate tax on revenues generated by working with them.

What will be the tax rate for a Free Zone Person with a mainland branch?

If a Free Zone Person has a branch in the UAE mainland, it will be taxed at the regular corporate tax on its income derived from the mainland. However, it can continue to benefit from the 0% corporate tax rate on its free zone income, if books of account of the mainland and the free zone are separate. If no separate books then 9% on both free zones as well as mainland income.

What is the tax rate for Free Zone Persons trading with the mainland without a branch?

Free Zone Persons without a mainland branch may transact with companies operating in the mainland UAE. In such cases, the Free Zone Person can continue to enjoy the 0% corporate tax rate, provided its income from the UAE mainland is limited to ‘passive’ income. Passive income can be royalties, dividends and capital gains earned from owning shares in the UAE mainland companies.

Requirements:

Free zone companies will need to register and file a corporate tax return, even though they won’t have to actually pay tax.

A Free Zone Person is required to audit their financial statements to avail 0% corporate tax regime.

If a Free Zone Person has a branch in the UAE mainland it is highly advised to maintain a separate set of books for mainland and free zone branches to save tax.

Watch this video to find out about how and where to set up your business with the upcoming Corporate tax in UAE!