Federal Tax Authority Unveils Guide for Free Zone Businesses on Corporate Tax

The Federal Tax Authority (FTA) of the United Arab Emirates has released a comprehensive guide to clarify how the recently implemented corporate tax applies to businesses operating in free zones. This guidance aims to provide transparency and facilitate a smooth transition for Free Zone Persons (FZPs) under the new tax regime.

The guide, titled "Corporate Tax Guide for Free Zone Persons" (FZP Guide), outlines the specific requirements for FZPs to qualify for the zero-percent corporate tax rate on Qualifying Income. The UAE introduced corporate tax in June 2023, with a 0% rate for Qualifying Free Zone Persons engaged in Qualifying Activities. The FZP Guide details the conditions for achieving Qualifying Free Zone Person status, including the nature of permissible business activities.

A key aspect of the FZP Guide is the categorization of Qualifying Activities and Excluded Activities. Businesses undertaking activities listed as Qualifying can benefit from the zero-tax rate on their Qualifying Income. The guide also clarifies the concept of "de-minimis" requirement, which determines whether a non-Qualifying Activity can be considered insignificant enough for the FZP to retain its Qualifying Free Zone Person status.

The FTA's issuance of the FZP Guide comes after the introduction of Cabinet Decision No. 100 of 2023 and Ministerial Decision No. 265 of 2023. These decisions supplemented the Corporate Tax Law by providing further explanations on Qualifying Activities, Excluded Activities, and the de-minimis test. While these pronouncements offered some direction, the FZP Guide serves as a more consolidated and user-friendly resource for FZPs navigating the corporate tax landscape.

The FZP Guide is expected to be particularly helpful for businesses operating in free zones across various sectors. It offers valuable insights into tax obligations, record-keeping requirements, and the process for claiming the zero-rate on Qualifying Income. By providing clear explanations and illustrative examples, the FTA aims to empower FZPs to make informed decisions regarding their tax liabilities under the new regime.

The release of the FZP Guide underscores the UAE's commitment to providing a clear and supportive regulatory environment for businesses in free zones. The zero-percent corporate tax rate for Qualifying Free Zone Persons remains a cornerstone of the country's strategy to attract foreign investment and foster economic activity within these designated areas.