what are the tax implications of using freezone ?
The United Arab Emirates (UAE) has established a network of free zones across the country, each offering unique benefits and tax implications for businesses. As the UAE moves towards implementing a corporate tax system, understanding the tax implications of operating in a free zone has become increasingly important for businesses.
Corporate Tax Exemptions
tax implications of setting up a business in a free zone
One of the primary benefits of operating in a UAE free zone is the exemption from corporate tax. Free zone entities are not subject to the 9% corporate tax rate that applies to mainland companies. This exemption is contingent on the free zone entity meeting certain requirements, such as:
- Deriving at least 90% of its income from free zone activities
- Maintaining adequate substance in the free zone
- Complying with transfer pricing rules and documentation requirements
Qualifying Income
tax implications of setting up a business in a free zone
Free zone entities can earn certain types of income that are considered "Qualifying Income" and are eligible for the 0% corporate tax rate. This includes income from:
- Transactions between free zone entities
- Leasing commercial property located within the free zone
- Providing services to entities located within the same free zone
De Minimis Requirement
tax implications of setting up a business in a free zone
Free zone entities are allowed to earn a small amount of non-qualifying income without losing their corporate tax exemption. This is known as the "de minimis requirement" and allows free zone entities to earn up to 5% of their total revenue from non-qualifying activities.
Repatriation of Profits
tax implications of setting up a business in a free zone
One of the key benefits of operating in a UAE free zone is the ability to repatriate 100% of profits without any currency restrictions or exchange controls. This makes it easier for businesses to move their earnings out of the UAE and into their home countries or other markets.
Ease of Setup and Operations
tax implications of setting up a business in a free zone
Setting up a business in a UAE free zone is generally easier and faster compared to mainland companies. Free zones offer streamlined processes, modern infrastructure, and business-friendly policies that make it attractive for entrepreneurs and startups.
Networking Opportunities
tax implications of setting up a business in a free zone
Operating in a free zone can also provide businesses with networking opportunities. Many free zones, such as Meydan Free Zone, are home to thousands of SMEs and large corporations, allowing entrepreneurs to connect with potential partners, clients, or investors.