A Complete Guide to Corporate Tax on Mainland and Free Zones in UAE

People who are considering starting a business in the landscape of the United Arab Emirates find it difficult to summarize where to set up a company. A majority of times they are confused between the Mainland and free zones area due to recently introduced Corporate Tax in UAE wide. For those who don’t know, corporation tax is significant to operate businesses in the country, hence it is important to know the differences between Mainland and Free Zones Corporate UAE tax.
One must know that businesses in Mainland and Free Zones have varying rules and tax rates, which is why it is important to contact professional tax advisors like ACE Tax Consultants to avoid all the major legal issues and penalties. In this blog, we are going to discuss the concept of corporate tax to free zones and the mainland in UAE.

Describe Corporate Income Tax on Free Zones

In the United Arab Emirates (UAE), free zones are designated areas that offer unique incentives to attract foreign investment and promote economic growth. These free zones typically have their regulations and policies, including those related to corporate income taxation. Here’s a general overview of corporate taxation in UAE free zones:

1. Zero Corporate Income Tax: Most UAE free zones offer 100% foreign ownership, which is attractive to international businesses. One of the key benefits is that companies established in these free zones are usually exempt from paying corporate income tax for a specified period, often ranging from 15 to 50 years. This tax exemption is a major incentive for businesses to set up operations in these zones.
2. Customs Duties: Free zone companies generally enjoy exemptions from import and export duties, making it easier and more cost-effective for them to import raw materials and export finished goods.
3. No Withholding Tax: UAE free zones often do not impose withholding taxes on dividends, interest, or royalties, which is advantageous for companies that distribute profits to their overseas parent companies.
4. No Personal Income Tax: Employees working within the free zones typically do not pay personal income tax, further reducing the overall tax burden on both businesses and their employees.

It's important to note that while free zones offer these tax advantages, there may be certain conditions and restrictions imposed by each free zone authority.
Also Read - VAT UAE Businesses Guidelines 2023

Describe Federal Corporate Tax on Mainland

With the introduction of federal Corporation Tax in the United Arab Emirates (UAE), businesses are keen to know the details about the newly introduced taxation policy. As per the new UAE Corporate Tax, businesses that are generating net profit or income of more than AUD 375,000 in a year need to pay a 9% tax on their annual income or profit. Other than corporation income tax, the UAE also relied on revenue generated from other sources, such as taxes on oil and gas production, customs duties, and fees for various government services.
However, it's important to note that the UAE implemented a Value Added Tax (VAT) system in 2018, which applies to most goods and services at a standard rate of 5%. This VAT is collected by businesses and remitted to the government, affecting businesses' operations and finances.
Additionally, the Ministry of Finance UAE also announced that all the large multinational firms with an annual profit of over EUR 750 Million are liable to pay a net of 15% tax under the agreement of Global Minimum Corporate Tax Rate. Please keep in mind that the new UAE Company tax is already in effect, so it’s advisable to reach out to professionals who are well-versed in UAE Corporate income tax policies and laws, just like us.

Who is Qualified as a Free Zones Person?

In the context of the United Arab Emirates (UAE), the term "free zone persons" refers to individuals or entities that are eligible to operate within UAE free zones and avail of the various benefits and incentives offered by these zones. Free zone persons typically include the following categories:

1. Companies and Businesses: This category includes both local and foreign companies that can establish their presence in a UAE-free zone. These companies can be engaged in various sectors, such as manufacturing, trading, services, and technology.
2. Entrepreneurs and Startups: Many free zones in the UAE have specific initiatives and facilities designed to support entrepreneurs and startups. Entrepreneurs with innovative business ideas and small businesses can often benefit from reduced setup costs, simplified registration procedures, and access to co-working spaces.
3. Branches of Foreign Companies: Foreign companies looking to establish a presence in the UAE without a local partner often opt to set up branch offices or subsidiaries in free zones. These branches can conduct business activities within the free zone and, in some cases, in the broader UAE market.
4. Freelancers and Independent Professionals: Some free zones offer options for individual freelancers and independent professionals, such as consultants, artists, and designers, to set up as free zone entities. This allows them to operate legally and enjoy the benefits of the free zone environment.
5. Investors and Shareholders: Individuals or entities investing in businesses within a free zone can also be considered free zone persons. They may hold shares in companies or participate as investors in various free zone projects.
6. Employees: Employees working within a free zone, whether for free zone companies or free zone authorities, are also considered free zone persons. They often enjoy benefits such as no personal income tax.

It's important to note that the specific requirements and eligibility criteria for becoming a free zone person can vary from one UAE free zone to another. Each free zone has its own set of regulations, procedures, and incentives, so individuals and businesses should research and contact the specific free zone authority where they intend to establish their presence for detailed information on eligibility and the benefits offered.
Must Read – Everything About UAE Tax

Why to Function Your Company in UAE Free Zone?

Starting a company in a United Arab Emirates (UAE) Free Zone offers numerous advantages that make it an attractive option for entrepreneurs and businesses. Here are some compelling reasons to consider establishing your company in a UAE Free Zone:
100% Foreign Ownership: In most UAE Free Zones, foreign investors can own their companies outright, without the need for a local partner or sponsor. This level of ownership control is a significant advantage for international businesses.

• Tax Benefits: One of the primary reasons companies choose UAE Free Zones is the tax incentives. Many Free Zones offer a 0% corporate tax rate for a specified period, often ranging from 15 to 50 years.
• Customs Duty Exemptions: Businesses in Free Zones can import and export goods without paying customs duties. This can result in significant cost savings, especially for companies involved in trading and logistics.
• No Currency Restrictions: There are typically no restrictions on the repatriation of profits or the movement of capital, making it easy to transfer funds in and out of the UAE.
• Infrastructure and Facilities: UAE Free Zones often provide state-of-the-art infrastructure, office spaces, and warehousing facilities, making it convenient for businesses to set up and operate.
• Business Support Services: Free Zones offers a range of support services, including administrative assistance, legal services, and business consulting, to help companies with their setup and ongoing operations.
• Access to Markets: UAE is strategically located at the crossroads of Asia, Africa, and Europe, making it an ideal hub for accessing regional and international markets. Many Free Zones offer excellent connectivity through ports and airports.
• Simplified Procedures: Setting up a company in a Free Zone is typically faster and involves fewer bureaucratic hurdles compared to mainland UAE. The streamlined processes make it more efficient for entrepreneurs.
• Industry-Specific Zones: UAE Free Zones cater to a wide range of industries, including technology, healthcare, logistics, media, and more. Some Free Zones are tailored to specific sectors, providing specialized support and infrastructure.
• No Personal Income Tax: Employees working within Free Zones often enjoy the benefit of no personal income tax, making it appealing for both employers and employees.
• Stability and Security: The UAE is known for its political stability and safe business environment, which is crucial for businesses looking to invest in the region.
• International Business Hub: UAE Free Zones are home to numerous multinational corporations and offer opportunities for networking and collaboration with other businesses.

Businesses established in Free Zones are typically restricted from conducting business directly with the UAE mainland market and may require a local distributor or agent for such activities. Therefore, it's essential to conduct thorough research and seek professional advice to determine which UAE Free Zone best suits your business needs and objectives.