The United Arab Emirates (UAE) is a hub for international business, and its Free Zones (FZs) are a major reason. These designated areas offer significant advantages for companies, including startups, due to their tax benefits and streamlined setup processes. The strategically located FZs offer a unique blend of advantages, including world-class infrastructure, simplified business setup processes, and most importantly, a tax regime designed to empower businesses. Unlike the mainland UAE, FZs provide a game-changing incentive for startups and established companies alike: a 0% Corporate Tax rate on qualifying activities.

Tax Advantages for Qualifying Free Zone Businesses

The UAE’s recent Corporate Tax regime recognizes the importance of FZs. Businesses operating within these zones, known as Qualifying Free Zone Persons (QFZPs), can enjoy a highly attractive 0% Corporate Tax rate on specific activities and transactions. This applies to:

• Transactions between QFZPs and Free Zone Persons (where the Free Zone Person is the Beneficial Recipient of these transactions).

• Certain activities performed from within the prescribed geographical areas of a Free Zone (or a Designated Zone for distribution activities).

Corporate Tax for Free zones: Benefits for businesses with no Initial Revenue

Even if a startup or a business within a Free Zone doesn’t generate any initial revenue (Qualifying Income), it can still qualify for tax exemptions. As long as the company operates within the designated area and doesn’t earn income from non-qualifying activities, it can benefit from this tax break. This allows startups the breathing room they need to establish themselves without the burden of corporate tax.

Maintaining Your QFZP Status in the Free Zones

The benefits of being a QFZP are substantial, but maintaining this status requires adhering to certain conditions. A company can lose its QFZP designation and be subject to standard corporate tax rates for four years if it:

• Opts Out of QFZP Benefits: Companies can choose to forgo QFZP advantages and enter the standard tax regime. However, this comes with a four-year period where they can’t reclaim QFZP tax benefits.
• Fails to Meet Qualifying Criteria: Not meeting the qualifying criteria for a specific tax period can also result in losing QFZP status for the following four tax periods.

Case Study:

Company X (a QFZP) is incorporated on July 1st, 2023, in a Free Zone with the aim of developing and providing innovative educational software (a Qualifying Activity). The company operates in the calendar year for its Tax Period. During the remainder of 2023 and the entirety of 2024, Company X focuses on its preparatory phase.

Due to being in the development stage, Company X doesn’t generate any Qualifying Income in 2023 and 2024 as its Qualifying Activity of educational software development isn’t fully operational. There’s no revenue generation during this period, but the company incurs expenses for development and staffing.

Analysis:

The absence of Qualifying Income in the initial phases (2023 and 2024) wouldn’t automatically disqualify Company X from its QFZP status. As there is no revenue generation from the Qualifying Activity. Therefore, Company X can potentially retain its QFZP status for the 2023 and 2024 Tax Periods, considering its future potential to generate Qualifying Income once the educational software is developed and launched, leading to revenue generation. Company X can file its Tax Returns as a QFZP for the initial years (2023 and 2024).

The UAE’s Free Zones, with their tax breaks and simplified setup processes, offer a ground for startups. With careful planning and adherence to QFZP requirements, companies can leverage these benefits to establish themselves and thrive in the UAE’s dynamic business environment.

Focus on your business, Let MS handle the Tax hassle

If you’re still trying to figure out the new UAE Corporate Tax system, MS can simplify the process. Our team of tax experts can handle everything from registration to filing, ensuring accuracy and efficiency. We will analyze your company’s finances to determine your exact taxable income, considering any exemptions or deductions available. By letting MS handle your corporate tax filing, you’ll save valuable time and resources, knowing your taxes are in the hands of professionals.