Corporate Tax Law in UAE : Activities & Qualifying FreeZones

The Corporate Tax Law in the UAE outlines taxation policies for businesses, particularly Qualifying Free Zone Persons (QFZPs). Under this law, QFZPs enjoy a 0% tax rate on Qualifying Income and a 9% tax rate on Taxable Income that does not qualify.

This guide explains the UAE's corporate tax regime, its impact on free zones, and key highlights for businesses.

1. Understanding the UAE’s Corporate Tax Law

The UAE’s Corporate Tax Law establishes tax obligations for businesses operating in free zones and mainland areas. Here’s what you need to know:

• 0% Tax Rate: Applies to Qualifying Income from transactions with Free Zone Persons and certain Non-Free Zone Persons.
• 9% Tax Rate: Applies to non-qualifying taxable income that does not meet the criteria.
• Qualifying Activities & Excluded Activities: The law specifies which activities qualify for tax benefits and which are excluded.
• De Minimis Provision: If non-qualifying revenue does not exceed 5% of total revenue or AED 5,000,000, the business can still benefit from the 0% tax rate.
• Domestic Permanent Establishment (PE): Businesses with operations outside free zones may be subject to 9% tax on income attributable to those activities.
• Substantial Business Presence: QFZPs must maintain substantial activities in the Free Zones, such as core income-generating functions, assets, and qualified employees.

2. UAE’s Corporate Tax History

The Corporate Tax Law was introduced to establish a clear taxation framework while maintaining the UAE’s reputation as a business-friendly environment. Key developments include:

• Taxation of QFZPs: No tax on Qualifying Income and 9% tax on non-qualifying income.
• Introduction of Qualifying & Excluded Activities: The law clarifies which transactions and business models benefit from tax incentives.
• Focus on Economic Substance: Companies must demonstrate active business operations within Free Zones to retain tax benefits.

3. Features of the Corporate Tax Regime

3.1. Taxation Rates

• 0% Tax: On Qualifying Income for QFZPs.
• 9% Tax: On non-qualifying taxable income.

3.2. Qualifying Income

The law defines Qualifying Income as:

• Revenue from transactions with Free Zone Persons (excluding Excluded Activities).
• Income from transactions with Non-Free Zone Persons related to Qualifying Activities.

3.3. Excluded and Qualifying Activities

• Excluded Activities:
  • Transactions with natural persons (except for certain shipping, aircraft, and wealth management services).
  • Banking, finance, leasing, and insurance activities.
  • Intellectual property ownership and exploitation.
  • Ownership or leasing of real estate (except commercial property within Free Zones).
• Qualifying Activities:
  • Manufacturing and processing of goods.
  • Holding shares and securities.
  • Shipping operations.
  • Fund and wealth management.
  • Financing and leasing of aircraft.
  • Distribution of goods from designated zones.

3.4. De Minimis Provision

A Free Zone company can still enjoy the 0% tax rate if:

• Non-qualifying revenue does not exceed 5% of total revenue or AED 5,000,000 (whichever is lower).
• If this limit is exceeded, the company is subject to a 9% tax rate for five years.

3.5. Domestic Permanent Establishment (PE)

• A Domestic PE is created when a QFZP has a business presence outside the Free Zone.
• Income from the Domestic PE is subject to 9% tax, but the 0% rate remains for Qualifying Income.

3.6. Adequate Substance Requirement

To maintain 0% tax benefits, a company must:

• Conduct core business activities in a Free Zone.
• Have sufficient assets, employees, and expenses within the Free Zone.
• Allow outsourcing to related parties, provided the business maintains oversight.

4. Will Free Zones Be Affected by Corporate Tax?

No, UAE Free Zones remain attractive under the Corporate Tax Law. While Qualifying Free Zone Persons (QFZPs) must comply with tax regulations, they still benefit from:

• 0% tax on Qualifying Income.
• 9% tax only on non-qualifying taxable income.
• A business-friendly tax structure that encourages investment.

Free Zones continue to offer incentives for foreign investment and business growth.

5. Will Free Zone Companies Be Taxed?

Yes, but only under specific conditions:

• QFZPs enjoy 0% tax on Qualifying Income.
• 9% tax applies to non-qualifying income.
• The taxation depends on the business activity and income type.

6. Will Personal Income Be Taxed in Dubai?

No, Dubai does not impose personal income tax on residents.

• Salaries, wages, and personal earnings remain tax-free.
• However, exceptions may apply to foreign financial activities.
• This makes Dubai an ideal financial hub for expatriates and entrepreneurs.

7. Will There Be Capital Gains Tax on Dividends in Dubai?

No, Dubai does not impose capital gains tax on dividends.

• Investors enjoy tax-free returns on dividends from investments.
• This makes Dubai an attractive location for global investors and businesses.

8. Key Highlights of UAE Corporate Tax Law for QFZPs

8.1. Tax Rates for QFZPs

✅ 0% tax on Qualifying Income.
✅ 9% tax on non-qualifying taxable income.

8.2. Definition of Qualifying Income

💼 Income from transactions with Free Zone Persons (excluding Excluded Activities).
💼 Income from Non-Free Zone Persons engaged in Qualifying Activities.
💼 Other income that meets de minimis requirements.

8.3. Excluded and Qualifying Activities

❌ Excluded Activities: Banking, finance, leasing, intellectual property exploitation, and real estate ownership.
✅ Qualifying Activities: Manufacturing, shipping, fund management, aircraft leasing, and logistics.

8.4. De Minimis Requirements

• Non-qualifying revenue must not exceed 5% of total revenue or AED 5,000,000.
• Exceeding this limit results in 9% tax for five years.

8.5. Domestic Permanent Establishment (PE)

• Businesses with a mainland presence are subject to 9% tax on income generated outside the Free Zone.
• However, Qualifying Income within Free Zones remains tax-free.

8.6. Substantial Business Presence Requirement

• QFZPs must conduct core business activities in Free Zones.
• Maintain sufficient assets, employees, and expenditures in Free Zones.

Final Thoughts

The UAE Corporate Tax Law ensures a business-friendly tax regime, maintaining Free Zones as an attractive hub for global enterprises. By understanding Qualifying Income, tax rates, and compliance requirements, businesses can optimize their operations while benefiting from Dubai’s favorable tax structure.

Would you like assistance in structuring your business for tax efficiency? Contact us today!

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