United Arab Emirates

Free Zone tax regime

Companies and branches registered in UAE Free Zones (there are more than 50 in the United Arab Emirates) are considered taxable persons under the UAE CT Law and are required to meet normal compliance obligations, including transfer pricing requirements.

However, provided a Free Zone entity meets the conditions to be considered a Qualifying Free Zone Person (QFZP), it should be eligible for a 0% UAE CT rate on its qualifying income. At the same time, the income of a QFZP that is not qualifying income will be taxed at the 9% CT rate. 

In order to qualify for the 0% UAE CT rate, a QFZP must meet all of the following conditions:

• Be a Free Zone person (i.e. a juridical person incorporated, established, or otherwise registered in a Free Zone, including branches).
• Maintain adequate substance in a Free Zone.
• Derive qualifying income.
• Not have made an election to be subject to the standard UAE CT regime.
• Comply with all transfer pricing rules and documentation requirements.
• Its non-qualifying revenue does not exceed the de minimis requirements.
• Prepares audited IFRS financial statements.

Where a Free Zone person fails to meet any of the qualifying conditions set out in UAE CT Law and in the corresponding Decisions, it will be treated as a taxable person subject to 9% CT rate on its full income for the current year and next four years. Thereafter, it may retest its QFZP status in the sixth year.

There are comprehensive Ministerial Decisions, Cabinet Decisions, and Guides that thoroughly regulate and explain the QFZP regime.

Adequate substance

In order to meet the adequate substance test, the QFZP’s core income-generating activities (CIGAs) shall be undertaken in a Free Zone, and the QFZP must maintain adequate assets, adequate number of qualified employees, and incur an adequate amount of operating expenditures.

The QFZP may outsource its CIGAs to a related or third party in a Free Zone, and the QFZP must have adequate supervision of the outsourced activity. In the case of qualifying intellectual property (IP) income of a QFZP, CIGAs can be outsourced to any person in the United Arab Emirates or any person outside the United Arab Emirates that is not a related party.

Qualifying income

Qualifying income includes the following:

• Income derived from transactions with other Free Zone persons, except for income derived from ‘excluded activities’.
• Income derived from transactions with non-Free Zone persons, but only in respect of ‘qualifying activities’ that are not ‘excluded activities’.
• Income derived from the ownership or exploitation of qualifying IP.
• Any other income, provided that the QFZP satisfies the de minimis requirements.

Excluded activities

Excluded activities include the following:

• Transactions with natural persons (subject to certain exceptions under ‘qualifying activities’ related to shipping and aircraft plus fund, wealth, and investment management).
• Regulated banking, finance, leasing, and insurance activities.
• Ownership or exploitation of immovable property, except for transactions with Free Zone persons in relation to commercial property located in a Free Zone.

Qualifying activities

Qualifying activities include the following:

• Manufacturing or processing of goods or materials.
• Trading of qualifying commodities.
• Holding of shares and other securities for investment purposes.
• Ownership, management, and operation of ships.
• Regulated reinsurance, fund management, wealth, and investment management.
• Headquarter, treasury, and financing services to related parties.
• Financing and leasing of aircraft.
• Logistics.
• Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof, or processes or alters such goods or materials, or parts thereof, for the purposes of sale or resale.
• Any activities that are ancillary to the activities listed above (i.e. serve no independent function but are necessary for the performance of the main qualifying activity).

The activity of distributing goods or materials must be undertaken in or from a Designated Zone (not ordinary Free Zone), and the goods or materials entering the United Arab Emirates must be imported through the Designated Zone.

De minimis requirements

The de minimis requirements will be satisfied where non-qualifying revenue does not exceed 5% of total revenue or AED 5 million, whichever is lower. Non-qualifying revenue is revenue derived from excluded activities or activities that are not qualifying activities where the other party is a non-Free Zone person.

Certain revenue shall not be included in the calculation of non-qualifying revenue and total revenue. This includes revenue attributable to certain immovable property located in a Free Zone (non-commercial property, and commercial property where transactions are with non-Free Zone persons) and revenue derived from the ownership or exploitation of IP. It also includes revenue attributable to a domestic PE or a foreign PE.

Domestic PE

The Decisions introduce the concept of a domestic PE where a QFZP has a place of business or other form of presence outside the Free Zone in the United Arab Emirates. Income attributable to a domestic PE should be calculated as if the establishment were a separate and independent person and shall be subject to CT at 9%.

It is important that domestic PE (i) will not disqualify the QFZP income from the 0% CT rate on qualifying income or (ii) will not be factored into the de minimis test (as above). A mainland branch of a QFZP is an example of a domestic PE taxed at the 9% CT rate.

Small business relief

The UAE CT Law provides a temporary (till 31 December 2026) tax relief for small businesses. A tax resident person may elect to be treated as not having derived any taxable income where the revenue for the relevant and previous tax periods does not exceed AED 3 million during each relevant tax year. If such threshold is exceeded, then the taxable person will be subject to UAE CT at the relevant rates as provided under the CT Law.

If a tax resident person applies for ’small business relief‘, certain provisions of the CT Law will not apply, such as exempt income, reliefs, deductions, tax loss relief, and transfer pricing compliance requirements, as specified in the relevant chapters of the CT Law. 

Transfers within a qualifying group

The UAE CT Law provides tax relief on intra-group transfer of assets or liabilities between taxable persons that are members of the same qualifying group. Taxable persons will be treated as members of the same qualifying group if all the following conditions are met:

• The taxable persons are tax resident entities, or non-residents that have a PE in the United Arab Emirates.
• The taxable persons are at least 75% commonly owned and have the same financial year and prepare the financial statements using the same accounting standards.
• None of the taxable persons are regarded as an exempt person or a QFZP.

There is a clawback period of two years from the date of initial transfer in the case there is a subsequent transfer of such asset or liability outside the permitted group or where transferor or transferee ceases to be a member of the permitted group.

Business restructuring relief

Similar to intra-group transfer of assets or liabilities within a qualifying group, the UAE CT Law provides tax relief on mergers, spin-offs, and other corporate restructuring transactions where the whole or an independent part of the business is being transferred in exchange for shares or other ownership interest, provided the following conditions are met:

• The transfer is undertaken in accordance with the applicable regulations in the United Arab Emirates.
• The taxable persons are resident persons, or non-resident persons that have a PE in the United Arab Emirates.
• None of the persons are regarded as an exempt person or a QFZP.
• They have the same financial year and prepare the financial statements using the same accounting standards.
• The transfer is undertaken for valid commercial or economic reasons.

There is a claw back period of two years from the date of the transfer if there is a subsequent transfer to a third party, or shares or ownership interests received are transferred or otherwise disposed of, and the gains or losses on the initial transfer will be reported in the period in which the subsequent transfer is made to the third-party.

Foreign tax credit

A credit is available for foreign taxes paid on a UAE taxable person’s income. The foreign tax credit is limited to the amount of UAE CT due on the relevant net taxable income. Any unutilised foreign tax credit cannot be carried forward or back and will be lost.