Introduction
The recent implementation of the corporate tax in the UAE is expected to bring about a substantial transformation in the business landscape, positively impacting the country's economy, according to Younis Haji Al Khoori, the Undersecretary of the Ministry of Finance. The finance ministry has unveiled two new decisions concerning free zone companies, providing clarity on the tax regime and its implications. These developments aim to diversify the UAE's economy and solidify its position as a regional business hub.
Driving Economic Growth
Younis Haji Al Khoori highlighted the significance of the corporate tax, stating that it would offer the government an additional income stream closely linked to business activities. The expansion of the economy and the increasing number of businesses in the UAE are expected to generate more income for the government. By implementing this tax, the UAE aims to foster economic growth and maximize the potential of its business sector.
New Decisions on Corporate Tax
The government has introduced two new decisions, namely Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023, which shed light on the conditions and qualifying income criteria for companies to benefit from the Free Zone Corporate Tax regime. These decisions reflect the UAE's commitment to diversifying its economy and reducing reliance on oil revenue. They also signify the government's intention to engage more directly with the private sector through tax collections.
Strategic Importance of the Tax Regime
Al Khoori stressed the strategic role of the tax regime in supporting the UAE's financial and economic sectors. He emphasized that the implementation of the corporate tax would lead to significant changes in business culture and practices. The Free Zone Corporate Tax regime primarily applies to juridical persons incorporated or registered in a Free Zone, with specific areas designated for this purpose.
Ensuring Thriving Strategic Sectors in Free Zones
Shabana Begum, the Executive Director for Tax Policy at the Ministry of Finance, highlighted that the tax regime has been designed to support the growth of strategic sectors within free zones. When asked about the possibility of tax exemptions encouraging companies to relocate to free zones, Begum reiterated that the objective was to ensure the thriving of strategic sectors while maintaining the attractiveness of the UAE as a business destination.
Qualifying Activities and Exemptions
The Free Zone Corporate Tax regime applies to various qualifying activities, including manufacturing, processing, shareholding, ship operation, reinsurance services, fund management, treasury and financing services, aircraft financing and leasing, logistics services, designated zone distribution, and ancillary activities. However, certain excluded activities such as transactions with natural persons, income from regulated financial services, income from intangible assets, and income from immovable property (excluding commercial property in a Free Zone) are not considered qualifying income.
De Minimis Requirements and Consequences
To remain eligible for the 0% tax rate, businesses must ensure that their revenue from excluded activities or non-qualifying income does not exceed either 5% of total revenue or AED 5,000,000. Failure to meet the de minimis requirements or other qualifying conditions will result in disqualification from the Free Zone Corporate Tax regime for a minimum of five years. During this period, businesses will be subject to the regular UAE corporate tax rate of 9% on taxable income above AED 375,000.
Conclusion
The introduction of the corporate tax in the UAE marks a significant milestone in the country's business landscape. It is expected to have a positive impact on the economy by providing an additional income stream linked to business activities. The new decisions regarding the tax regime for free zone companies aim to diversify the economy and strengthen the UAE's position as a regional business hub. Businesses operating in free zones must understand the qualifying criteria and exemptions to benefit from the Free Zone Corporate Tax regime. By embracing these changes, the UAE is poised to drive economic growth and remain an attractive destination for businesses.
