Other BriefingsUnderstanding UAE Small Business Tax Relief: FAQ
Business owners operating in the various UAE free zones are impatient to understand the corporate tax implications on their operations. Part of this is due to the new UAE tax regime scheduled to come into effect on 1st June this year, while decisions are yet to be published by the UAE Ministry of Economics concerning some of these changes, an issue that has led to some uncertainty.
To demystify common beliefs, we answer some of the questions around the tax implications.
What is a UAE Free Zone Company and its applicable tax treatment?
A free zone registered business has both qualifying income (at 0 per cent) and non-qualifying income (at 9 per cent). Can the entity claim Small Business Relief (SBR) on its non-qualifying income if this income is less than Dh3 million (@US$820,000)?
The SBR provides the tax relief – if a taxable person’s gross revenue does not exceed Dh3 million in a year, no corporate tax would be payable on its taxable income irrespective of the actual profit. The SBR relief will be available for financial years ending on or before December 31, 2026.
The SBR is not available to a ‘Qualifying Free Zone Person’ (QFZP). While the scope of QFZP will be specified through a UAE Cabinet decision, it is envisaged that a QFZP can earn both qualifying income (taxable at 0 per cent) as well as non-qualifying income (taxable at 9 per cent).
Accordingly, even if non-qualifying income is less than Dh3 million, the small business relief would not be available to a QFZP.
A free zone entity which is not a QFZP should be eligible for the small business relief. Free zone business owners should evaluate the eligibility as a QFZP and corresponding tax benefits.
Can a QFZP Claim 0 Per Cent Tax?
Every mainland business will enjoy a 0 per cent tax rate on its taxable income up to Dh375,000 (@US$103,000) every year. Can a QFZP also claim 0 per cent rate on its ‘non-qualifying income’ up to Dh375,000 to claim parity with the mainland businesses?
The 0 per cent rate for the taxable income up to Dh375,000 does not expressly cover QFZP or non-qualifying income. This is because the corporate tax rates have been specified separately for a qualifying free zone person (QFZP).
A 9 per cent rate has been specified for the entire non-qualifying income. A Cabinet decision will specify the scope of QFZP, qualifying income and the 9 per cent rate on the non-qualifying income. Businesses should wait to see if the cabinet decision proposes any tax benefit on non-qualifying income up to Dh375,000.
Can A UAE Free Zone Business Claim Expenses?
Corporate tax is applicable on net taxable income. Tax is not calculated on gross revenue. The decree law proposes a 9 per cent rate on non-qualifying income. Accordingly, the 9 per cent tax should be applicable only on non-qualifying income i.e. revenue less proportionate expenses relating to such revenue.
Business owners should ensure thorough and correct accounting of revenue and proportionate expenses.
Differences Between Fenced and Non-Fenced Free Zones
A fenced area of a free zone refers to such areas that have security procedures in place to control the movement of goods (bonded zones) and people to and from the free zone. Such fenced areas are often connected internally to the ports.
The unfenced areas of a free zone does not have any restrictions on the movement of people and goods. The fenced area of various free zones have been recognised as a designated zone under UAE VAT laws.
The corporate tax decree law does not differentiate between the fenced and the unfenced areas of a free zone. However, the public consultation documents (PCD) on corporate tax – released by the Ministry of Finance in 2022 – proposed a 0 per cent corporate tax rate on the sale of goods from a VAT designated zone to the mainland customers.
The cabinet decision – specifying the scope of 0 per cent qualifying income – may use the fenced/designated zone concept for the sale of goods to the mainland customers.
Both VAT and corporate tax are federal taxes and will be administered by the same authority i.e. the Federal Tax Authority (FTA). Many free zone companies have accumulated VAT credits.
Can a Free Zone Company Utilize VAT Credits to Pay Corporate Income Tax?
Though VAT and the corporate tax are both federal taxes, they are imposed under two separate decree laws. Businesses will have to pay VAT and CT separately. Even if a business is not registered under VAT laws, it may be required to register for CT and pay CT.
The VAT laws allow a seamless refund option for accumulated input VAT credits. Business owners should seek the option to claim refunds of its VAT credits.
Business owners need to understand the impact of the forthcoming corporate tax and the existing value added tax on their operations. Therefore, it becomes equally important to explain the tax laws in an easy-to-understand way and share tax insights.
For assistance with understanding UAE tax laws, please contact Maria Kotova of Dezan Shira & Associates at dubai@dezshira.com
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Middle East Briefing is one of five regional publications under the Asia Briefing brand. It is supported by Dezan Shira & Associates, a pan-Asia, multi-disciplinary professional services firm that assists foreign investors throughout Asia, including through offices in Dubai (UAE), China, India, Vietnam, Singapore, Indonesia, Italy, Germany, and USA. We also have partner firms in Malaysia, Bangladesh, the Philippines, Thailand, and Australia.
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