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.

In the United Arab Emirates (UAE), a business may choose to deregister for value-added tax (VAT) for various reasons, as long as those reasons fall within the parameters set by the country’s Federal Tax Authority (FTA). To deregister, a business must cancel its registration with the FTA.

It is important for a company to have a valid reason for deregistering for VAT, as the FTA has the right to approve or reject deregistration applications and may impose penalties for invalid or illegitimate requests.

A business is eligible for VAT deregistration in the UAE if it meets certain conditions set by the FTA, such as when it stops dealing in taxable goods and services, or when its annual turnover of taxable supplies or expenses in the past 12 months falls below the VAT registration threshold of AED 187,500.

A business may also choose to deregister voluntarily if it has not reached the mandatory VAT registration threshold of AED 375,000 in taxable supplies in the past 12 calendar months or if 12 calendar months have passed since it registered for VAT on a voluntary basis. It is recommended to seek the assistance of experienced and qualified tax agents to ensure a successful deregistration process.

VAT (Value Added Tax) is an indirect tax that was first applied to the majority of goods and enterprises at a very low rate of 5%. Even though the UAE government has exempted food items, healthcare services, and education from VAT, residents may still see a slight increase in their cost of living. It is important to keep in mind, nevertheless, that a little increase in VAT will not put a significant impact on household budgets while still enabling good living standards to increase.

Businesses must alter their current procedures in order to comply with VAT and related legal requirements. Businesses must make sure that their accounts or records are properly kept in accordance with the new VAT requirements put in place by the government as of January 1,2018.

According to the Federal Tax Authority, businesses in the UAE that supply and import products and services that are subject to tax and have annual sales above AED 375,000 are required to register for VAT. According to FTA, all enterprises must make sure that their financial activities are recorded, aside from fulfilling the requirements for VAT registration, and that ledgers are updated on time to avoid fines.

The Federal Tax Authority (FTA) is mandated by law to make it clear that only those individuals may apply for a VAT Registration Exception if 100% of their supplies or sales are zero-rated. Exporters who choose to forego any type of VAT registration are required to notify the FTA authority in advance of their decision using the VAT Registration form.

The application for an exception will undoubtedly be approved if the higher authority discovers such a logical method behind the scenes.