Though the companies registered in Free Zone will be subject to UAE Corporate Tax, the UAE CT regime will continue to honor the incentives offered to businesses set up in free zones provided it is a qualifying free zone.
Therefore, businesses set up in free zones which are qualified will be benefited from 0% corporate tax on the following qualifying incomes:
Income earned from activities of businesses set up outside of the UAE.
Income earned from trading with businesses located in the same or other free zones.
Income earned from certain regulated financial services directed at foreign markets.
However, if a business set up in a free zone has a branch on the mainland, then income earned by such a branch would be taxable to corporate tax at the regular rates. If it does not have any branch in the mainland but it transacts with mainland UAE and if the income derived is in the nature of passive income, then such income would not be subject to corporate tax. Such passive income would include interest, royalties, dividends, and capital gains from owning shares in mainland UAE companies.
Further, the transactions between the free zone entities and their group companies located in mainland UAE would be exempt from corporate tax. And, to nullify the effect of these transactions, payments made to the Free Zone Person by a mainland group company will not be deductible, from the taxable income computed for the mainland company.
Measures for preventing unfair advantage to Free zones entities
To prevent Free Zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE, any other mainland sourced income will disqualify a Free Zone Person from the 0% CT regime in respect of all their income. Such incomes will be treated as non-qualifying income and subject to the corporate tax at the prescribed rates.
A free zone person may elect to be subjected to the regular corporate tax at any time and such election would be irrevocable. Where a Free Zone Person benefits from the 0% CT regime in respect of mainland sourced income, such income will be within the scope of withholding tax (presently at 0%).
Offshore companies can be set up in the UAE in some of the special zones. Though the Corporate tax regime does not specifically mention the levy of corporate tax in respect of offshore companies, due to their foreign entity status, their incomes earned from exports or foreign sources, will be exempt and treated at par with free zone entities.
Taxability of Branches of Foreign Entities
Foreign entity branches in the UAE will be subject to corporate tax if they are not exempted or set up in the free zones.
The tax of branches of foreign entities would be computed in accordance with the tax laws applicable in the head office jurisdiction. In order to prevent double taxation of the income of the foreign branches, either the foreign profits may be exempted by Exempted Method or the credit of taxes paid in the UAE may be availed.