UAE Corporate Tax: Why UAE free zone businesses must stay on right side of '5% of total revenue or Dh5 million'

Dubai: Now that free zone based businesses in the UAE have clarity on what the ‘qualifying income’ should be, their focus should remain steadfast on two numbers when it comes to corporate tax.

Through any future tax period, these businesses must at all times satisfy one requirement – that their ‘non-qualifying’ revenues must not exceed the lower of 5 per cent of their total revenue or Dh5 million. (This is known as the ‘de-minimis’ threshold.)

If these numbers are breached, the free zone based business will no longer benefit from the 0 per cent corporate tax.

For an extended period of 5 years.

In fact, they will be treated as a taxable enterprise, with the obligation to pay corporate tax at 9 per cent itself. If their income for the year is over Dh375,000.

"The tax rules recognizes the continued importance of free zones to the UAE economy and their tax-related commitments," said Deepak Bansal of AskPankaj Tax Advisors. "The free zone benefits lay special emphasis on tax compliance - and robust accounting - thus making it a key focus area for business owners."

In other words, free zone businesses have to at all times fly in lower than the two limits on all their non-qualifying revenue, which is essentially anything that is not 0 per cent rated.

“Where the minimum requirements aren’t met or the free zone entity doesn’t continue to meet any qualifying conditions, they cannot benefit from corporate tax exemption,” said James Swallow, Commercial Director, PRO Partner Group.

"This means free zone entities cannot undertake mainland UAE business above this threshold. If they do, then potentially all revenue will be taxed at 9 per cent."

According to Jeet Gianchandani of Jitendra Consulting Group, “Even with the de-minim threshold, all the incentives offered to free zone businesses will come as a big relief.

Free zone businesses to decide

As has been its standard practice all through, the Ministry of Finance has given quite some flexibility for free zone businesses on where they want to be placed in the corporate tax process.

If these businesses have substantial operations on the mainland as well, they cannot seek to be part of the standard corporate tax regime, thereby coming under the 9 per cent coverage. If the operations are confined only within or between free zones, they can elect for the 0 per cent status.

These businesses must confirm with their respective free zone authority if that hub will be eligible for the 0 per cent status.

Selling commercial property

Another important provision in the free zone business guidelines relate to selling commercial property.

A free zone business will come under the standard 9 per cent tax rate for income from a commercial property deal located in a free zone. And where the transaction is with a non-free zone buyer.

The 9 per cent also kicks in on income derived from residential and other non-commercial property located in a free zone.

But these free zone businesses will not be ‘disqualified from the free zone corporate tax coverage because of these income flow-ins.

Free zone business will need to go deep into all the nitty-gritty of these guidelines. As said earlier, the Ministry has given a fair measure of flexibility, leaving it to these businesses themselves on how they should be treated for corporate tax purposes.