For individuals considering business setups in UAE freezones, the question of corporate tax on their profits often arises. The answer is not straightforward, as taxation rules vary between freezones. This article aims to clarify the general principles of corporate tax in the UAE and its application to freezone businesses.

Corporate tax is a government levy on a company’s income or profits, often a significant source of state revenue. The UAE is renowned for its low-tax or no-tax system, attracting global investors and entrepreneurs. Corporate tax is generally not imposed on most businesses, except for specific sectors like oil and gas, banking and finance, and branches of foreign banks. These sectors may face corporate tax rates between 1% and 55%, depending on their location and activities.

Freezones are specialized economic zones in the UAE, providing incentives like 100% foreign ownership, complete capital and profit repatriation, exemption from import and export duties, and simplified registration procedures. The UAE hosts over 40 freezones, each with its own rules. Prominent ones include Dubai International Financial Centre (DIFC), Jebel Ali Free Zone (JAFZA), Dubai Multi Commodities Centre (DMCC), Sharjah Airport International Free Zone (SAIF Zone), Ajman Free Zone (AFZ), and Ras Al Khaimah Economic Zone (RAKEZ).

A key benefit of establishing a freezone business is the exemption from corporate tax for a specified period, usually 15 to 50 years, depending on the freezone. This allows freezone companies to enjoy tax-free profits, promoting growth and competitiveness. Nevertheless, certain situations can subject freezone companies to corporate tax, including when they:

• Conduct business outside the freezone or with mainland companies, which may trigger tax liability in the emirate of operation.
• Engage in activities in the mentioned taxable sectors (e.g., oil and gas, banking, or foreign bank branches), subjecting them to sector-specific tax rates.
• Maintain permanent establishments or branches in countries with corporate tax, potentially resulting in double taxation unless a double tax treaty provides relief.

Freezone companies must grasp the tax implications of their operations and stay informed about tax laws in both the UAE and their international markets. Consulting professional tax advisors can ensure compliance and optimal tax positions.

In summary, corporate tax applies to specific freezone companies under certain conditions, but not universally. While freezone businesses can enjoy the UAE’s favorable tax environment for an extended period, they should remain vigilant about potential tax obligations stemming from their operations. This awareness empowers informed decision-making and the achievement of business objectives.

The Ministry of Finance in the United Arab Emirates (UAE) has announced the implementation of a 9% federal corporate tax on business profits with a threshold of AED 375,000, starting from the financial year beginning June 1, 2023. The UAE’s corporate tax rate is one of the most competitive in the world and the lowest in the Gulf Cooperation Council (GCC), where Bahrain is now the only country without a corporate tax regime. The corporate tax regime in the UAE is expected to be implemented with easy compliance requirements and to follow best global practices.

The following types of income will be exempt from corporate tax in the United Arab Emirates:

• Dividends earned from UAE companies
• Dividends paid by foreign companies, and capital gains from the sale of shares in both UAE and foreign companies, provided certain conditions are met
• Capital gains on the disposal of shares in a Free Zone Person, if the Free Zone Person is a holding company and a significant portion of its income is derived from shareholdings in subsidiary companies that qualify for the participation exemption
• Foreign branch profits of UAE companies, which can be claimed through either a foreign tax credit for taxes paid in the foreign branch country or an exemption for the foreign branch profits
• Income earned by a non-resident from operating or leasing aircraft or ships (and related equipment) used in international transportation, subject to certain conditions.