UAE Free zone vs mainland corporate tax obligations

The Corporate Tax Regulation was legally established through Federal Decree-Law No (45) of year 2022 in the United Arab Emirates (UAE) starting from June 1st of the year 2023 at a basic rate of 9% . This introduced new corporate tax responsibilities of operating firms in the UAE for both free zones and the mainland. 

 This Artcile seeks to identify and compare the major corporate tax compliance and issues that free zone companies and those operating in the mainland under the new tax regime are likely to face.

UAE Free zone vs. mainland companies

There are broadly two types of business set-ups in the UAE - mainland and free zone companies.

Mainland Companies

Mainland companies refer to businesses directly registered with the Department of Economic Development (DED) of each Emirate. These companies have the freedom to operate across the UAE as well as globally.

Free Zone Companies

Free zones are designated geographical areas within the Emirates that have separate commercial and judicial regulations from the mainland. Over 45 free zones exist in the UAE catering to various industries. Free zone companies are registered with the regulatory authority of each individual free zone.

The main difference between mainland and free zone companies in the UAE is where they can do business. Mainland companies can operate anywhere in the UAE. However, free zone companies can only do business inside their specific free zones unless they hire a local agent to work outside those areas.

UAE Free zone vs. mainland corporate tax obligations

Whereas the general corporate tax regime applies to the UAE, there are certain distinctions in the treatment and taxation of entities in free zones as compared to those in the mainland. 

Free zone entities

• Qualifying Free Zone Entities (QFZEs) are allowed a corporate tax rate of 0% on “predetermined” income derived from non- UAE operations or from another QFZE
• The income qualifying for the tax exemption involves the exportation of goods and services to countries outside the UAE, exportation of goods and services from one free zone to another free zone or from a free zone to a designated area in the UAE.
• Income that does not meet the "qualifying" criteria (e.g. income from mainland activities) is taxed at 9%
• Must maintain separate commercial books for any mainland branch to avail 0% rate on free zone income
• Are required to register for tax, file annual returns, undertake audits even if no tax is payable

Mainland entities

• All taxable income is subject directly to the 9% corporate tax rate once profits exceed AED 375,000
• No distinction was made between different sources/locations of income
• Required to comply with the full scope of tax obligations including registration, returns, audits, etc.
• Can specifically offset its losses over future tax periods by use of loss carry forward.
• It may be subject to taxation on specific transactions associated with the formation of corporations such as mergers.
• Some of the ways through which firms may cut on their tax outflows include government support programs and subsidies.
• Free zones’ conditions also differ regarding the types of activities and their location in the sense of the applicable tax rate.

Compliance timelines

The key compliance timelines and obligations are largely harmonized for both free zone and mainland taxable persons as summarized below:

Filing Of Corporate Tax Returns

Tax Period	Registration Period	First Tax Period	Return Filing Period	Return Filing Due Date
June 2023 - May 2024	January 2023 - February 2025	June 1, 2023 - May 31, 2024	June 1, 2024 - February 28, 2025	February 28, 2025
January 2024 - December 2024	January 2023 - September 2025	January 1, 2024 - December 31, 2024	January 1, 2025 - September 30, 2025	September 30, 2025

However, Qualifying Free Zone Entities may need to closely monitor activity types and counterparties to ensure "qualifying" status is maintained to benefit from the preferential 0% tax rate.

FAQs

1. Is there a threshold for corporate tax registration?
   No, all taxable persons including free zones and mainland companies must register for tax irrespective of turnover, losses, or anticipated tax liability.
   
2. Do all UAE companies need to register for corporate tax?
   Yes, except exempt persons all resident companies including free zones need to register.
   
3. What is the tax filing due date?
   Annual tax returns need to be filed within 9 months of financial year end.
4. How can a free zone company avail 0% tax benefits?
   By maintaining separate books for free zone and mainland income and deriving majority income from non-UAE sources.
5. Is there a threshold for corporate tax applicability?
   No, even loss making companies need to register but tax applies only on profits exceeding AED 375,000.
6. Can tax incentives be availed in free zones?
   Possibly, some free zones offer other non-tax incentives like longer visas based on activities.

 

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Conclusion

The corporate taxation process is integrated across the UAE but the free zone corporations are accorded favorable taxes as compared to the mainland firms if they meet certain criteria. Relative to the new tax environment, businesses need to consider activity types, locations, and transfer pricing relationships to better manage and fulfill their tax requirements. Strong compliance will have to be upheld in order to demonstrate compliance with all eventualities that make an organization eligible for reliefs or exemptions.

Ready to make the right choice for your business? Contact CorporateTaxUAE Consultants for expert advice on UAE corporate tax and free zone vs. mainland setups. Your path to success starts here!