Choosing the right business structure and location is a crucial yet initial step when starting a business in the United Arab Emirates (UAE). Out of the seven Emirates, Dubai stands out with its excellence in areas like tourism, real estate and trade etc. attracting the crowd including High Net Worth Individuals around the globe. For the last 20 years, the Dubai International Financial Centre (DIFC) in Dubai has offered numerous incorporation benefits, making it the best choice for many, and with the option to establish an operational company. Setting up a business in the DIFC provides several advantages over other parts of Dubai.
The DIFC offers benefits such as proximity to major markets, flexible company structures, strong intellectual property protection, a streamlined visa process, access to funding, and a supportive environment for business growth. These advantages can significantly help companies succeed in today’s competitive business landscape.
Corporate Tax Rate in the DIFC for Operational Companies
The UAE’s new federal corporate tax system offers significant advantages to businesses operating within its Free Zones including DIFC. These entities can enjoy a 0% corporate tax rate, but specific criteria need to be met. In contrast, companies located outside Free Zones face a standard 9% tax on their taxable income exceeding AED 375,000. However, Free Zone businesses including operational companies can maintain this attractive 0% tax rate on their qualifying income by achieving Qualifying Free Zone Person (QFZP) status. It’s important to note that any income earned by a QFZP that doesn’t meet the qualifying criteria will be taxed at the standard 9% rate. This system provides a clear incentive for Free Zone companies to comply with QFZP requirements and continue benefiting from a competitive tax environment.
To understand the Corporate Tax implications for Free Zone operational companies, let’s first explore the core features of the new UAE Federal Corporate Tax system.
Which of the DIFC entities Qualifies for a 0% Corporate Tax Rate?
The good news is that possibly most of the operational companies in the DIFC can benefit from a 0% corporate tax rate on their qualifying income. To qualify as a Qualifying Free Zone Person (QFZP) and enjoy this tax advantage, your company must meet specific criteria:
- Substantial Presence in the UAE: Demonstrate a strong physical presence in the UAE with a local office and employees.
- Qualifying Income Generation: Your primary source of income must stem from compliant business activities conducted within the DIFC or with international clients.
- Opting Out of Standard CT Rates: You cannot choose to be taxed under the standard corporate tax rates that apply outside Free Zones.
- De Minimis Threshold: Any non-qualifying income must be below 5% of your total revenue or AED 5 million, whichever is lower.
- IFRS-Compliant Audits: Maintain accurate financial records and have them audited according to International Financial Reporting Standards (IFRS).
- DIFC Authority Requirements: Ensure compliance with any additional stipulations set forth by the DIFC.
What Activities of operational companies in the DIFC qualify for the 0% Tax Rate?
The UAE Ministry of Finance categorizes business activities for corporate tax purposes. Here’s a focus on qualifying activities that benefit from the 0% tax rate in the DIFC or any other Free Zone.
- Manufacturing and Processing
- Trading of Qualifying Commodities
- Investment Holding
- Ship Ownership and Management
- Reinsurance and Fund Management Services
- Wealth and Investment Management
- Headquarters and Treasury Services to Related Parties
- Financing and Leasing of Aircraft
- Distribution and Logistics Services
- Ancillary Activities Supporting the Above
It’s important to note that there are also excluded activities listed in the official documentation that may not qualify for the 0% tax rate benefit.
Understanding Qualifying Income for Operational Companies in the DIFC
Qualifying income refers to the portion of your company’s earnings that is eligible for the 0% corporate tax rate in the DIFC. Here’s a breakdown to help you determine what qualifies:
- Transaction with another Free Zone person: If your business transactions are with another business entity within the same Free Zone, the income generated from these transactions can be considered as qualifying income.
- Transaction with a non-Free Zone person: If your business transactions are with an entity outside the Free Zone, the income from these transactions may not be considered as qualifying income.
- Income from all other transactions: All other income, provided they satisfy the de minimis requirements, can be considered as qualifying income.
However, qualifying income does not include income generated from domestic (mainland) or foreign permanent establishments, immovable property outside the Free Zone, and certain other activities like income from non-commercial properties.
Corporate Tax: Filing and Payment Procedures for DIFC Companies
- Registration: Applications for corporate tax registration are submitted through the DIFC’s Corporate Registry. They will assess your eligibility for a Corporate Tax Registration Certificate (OCRT).
- Required Documents: The registration process involves submitting an application, paying fees, and providing detailed financial information, including income, expenses, assets, liabilities, and capital.
- Ongoing Obligations: Once registered, you must comply with the relevant tax rules and regulations set by the Federal Tax Authority (FTA). This includes filing yearly tax returns reporting your taxable income and profits. You may also need to submit annual financial statements and audited financials upon request from the FTA.
- Simplified Filing: The FTA offers various e-services for DIFC taxpayers, including online registration, tax return submission, and online tax payments. They also have a Voluntary Disclosure Program for rectifying past non-compliance.
MS for corporate tax compliance Operational companies in the DIFC
Uncertain about the impact of the UAE’s new Corporate Tax Law on your operational company in the DIFC? MS can be your trusted advisor. We provide comprehensive support, from maximizing the 0% tax benefit offered by Free Zones to ensuring compliance with transfer pricing regulations. Our experts simplify tax record keeping and reporting, keeping you informed of any future changes in the tax environment. Let MS guide your operational company towards success in the DIFC.
