The Basics of UAE Corporate Tax
The UAE introduced a federal Corporate Tax (CT) effective for financial years starting on or after 1 June 2023. This tax applies to the profits of businesses operating in the UAE.
The Tax Rates:
- **0%** on taxable income up to **AED 375,000**.
- **9%** on taxable income that exceeds **AED 375,000**.
Free Zone Companies: The 0% Rate
A major attraction of UAE free zones is the potential for a 0% corporate tax rate. However, this is not automatic. To benefit from it, a free zone company must be a **"Qualifying Free Zone Person" (QFZP)** and earn **"Qualifying Income."**
To be a QFZP, you must:
- Maintain adequate substance in the UAE (i.e., have offices, staff, and management in the free zone).
- Derive 'Qualifying Income'.
- Comply with all transfer pricing rules.
- Prepare audited financial statements.
What is 'Qualifying Income'?
This is the most critical concept. Generally, Qualifying Income includes income from transactions with businesses located outside the UAE, or with other businesses located in any UAE free zone.
Income from selling goods to a UAE Mainland company is generally *not* Qualifying Income and would be subject to the standard 9% tax rate (if profit exceeds AED 375,000). There are some exceptions for services.
Final Thoughts
While the headline 0% tax rate is appealing, the rules are complex. The distinction between Qualifying and non-Qualifying income is vital. Proper accounting and structuring are essential to ensure your free zone company can legally benefit from the 0% rate.