The UAE has long been a global financial center and a prominent business hub in the Middle East, offering multiple benefits to businesses and foreign investors. One of the biggest incentives included the ‘nil’ tax on profits earned in the country, with only a few exceptions. However, the introduction of a Federal Corporate Tax (CT law) in December 2022 has changed the landscape for businesses operating in the UAE, especially those in Free Zones. Here’s what distributors and traders need to know about these changes and how they can continue to benefit from the zero percent tax rate.

Understanding the New Corporate Tax Law

Before we dive into the specifics of how the new corporate tax law impacts Free Zone businesses, let’s first understand the key aspects of this new system:

• Mainland Businesses: Licensed businesses operating on the UAE mainland are subject to a 0% tax rate on taxable income up to AED 375,000 and a 9% corporate tax on taxable income above AED 375,000.
• Free Zone Businesses: For businesses operating in tax Free Zones, a different tax structure applies:

• A 0% corporate tax rate is applied to the qualifying income of businesses recognized as Qualifying Free Zone Persons (QFZPs).
• Non-qualifying income in the tax Free Zone is subject to a 9% corporate tax, with possible exceptions or relief.

This structure impacts all businesses in the UAE, including foreign businesses with offices there. The specific impact depends on whether the business is in UAE corporate tax free zone or the mainland during the tax period.

What Distributors and Traders Need to Know About UAE Free Zones

The Zero Percent Tax Benefit for Trading Companies

Trading companies in designated UAE corporate tax free zone, including exporters and importers, benefit most from the zero-percentage tax provision in the corporate tax irrespective of their dealings with mainland companies, according to the new guidelines issued by the UAE Federal Tax Authority. This tax benefit for wholesale and high-sea traders, as well as importers and exporters, will give a significant boost to the UAE’s exports and manufacturing sectors.

As per the framework of UAE corporate tax rolled out in 2023, a nine percent tax rate has been set for annual taxable income of above Dh375,000 for all businesses. Qualifying free zone businesses can enjoy a zero-tax rate on qualifying income. However, to be eligible for this benefit, they must meet the relevant conditions and substance requirements.

Distribution Businesses

While distribution businesses in all free zones will not get zero percentage tax benefits, Qualifying activities companies that distribute goods can import goods from outside the UAE to the mainland, provided they satisfy certain conditions.

Importing and Exporting Goods

The guidelines have clarified the treatment of taxation of trading firms in designated free zones. A trader importing goods in a designated free zone such as Jafza, Dafza, or Saif Zone imports goods from outside the UAE for selling to mainland customers can avail of zero percent tax benefits provided the sales are made through designated UAE corporate tax free zone. Another interesting clarification is on the export of goods. Even if the designated free zone company buys goods from the mainland and exports the same to customers outside the UAE, the profits from such sales will also be eligible for zero percent corporate tax, provided these goods have to pass through the designated free zones.

Ensuring Compliance for Zero Percent Tax Benefits

Tax experts said even the purchase of goods from the mainland and export of the same to customers outside a designated free zone qualifies for zero percent tax. In this scenario, FZP should have a sufficient number of qualified employees, and the business must be conducted from offices within the designated free zones.

Customers’ Use of Goods

If customers use the goods for their consumption, the supplier/trader will not be eligible for the zero-rated corporate tax. To get the zero percentage tax benefits, the trader in the designated free zone should maintain adequate substance. This requires that the distribution activity be conducted in or from the designated free zone; FZP should have a sufficient number of qualified employees, and the business must be conducted from offices within the designated free zones.

Key Benefits of Operating In A UAE Free Zone

• Zero Percent Corporate Tax: Profits generated within the free zone are not subject to corporate tax or any other income tax for businesses, allowing businesses to reinvest earnings or distribute profits freely.

• 100% Foreign Ownership: UAE corporate tax free zone permit 100% foreign ownership of businesses, making it attractive for international investors without the need for a local partner.

• Full Repatriation of Profits and Capital: Businesses can repatriate 100% of their profits and capital, providing flexibility and financial security for multinational companies.

• Customs and Import/Export Benefits: Streamlined customs procedures and duty exemptions on imports and exports facilitate cost-effective movement of goods in and out of the UAE.

• Simplified Business Setup and Licensing: Business setup in free zones is faster and less bureaucratic compared to the mainland, with comprehensive support services for licensing, visas, and administrative requirements.

The zero percent tax incentive in UAE free zones presents a lucrative opportunity for distributors and traders looking to expand their operations in the Middle East and beyond. By understanding the benefits and compliance requirements, businesses can effectively leverage these advantages to enhance their competitiveness and achieve sustainable growth. With strategic planning and adherence to regulations, operating in a UAE-free zone can be a game-changer for your business.

Corporate Tax Services For Designated Free Zones

Auditac International provides full-fledged legal, compliance, and tax advisory support as well as business consulting services to implement corporate tax for both the mainland UAE and the UAE Corporate Tax-Free Zone. We have expertise in all aspects of Corporate Tax. 

Need help with the corporate tax in the Dubai free zone? We have the right solution for you!

At Auditac  International, we have a team of financial experts to help UAE businesses with corporate tax law. We aim to simplify the entire process with the best solutions. Get connected to one of our experts at Auditac International to understand more about Zero percent tax in Free Zones.