The United Arab Emirates offers businesses a unique opportunity to operate in Designated Free Zones in the UAE, areas recognized for their distinct corporate VAT and corporate tax implications. Understanding these policies is essential for companies planning operations in the UAE.
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What Are Designated Free Zones in the UAE?
From a VAT perspective, Designated Free Zones are viewed as outside the UAE’s jurisdiction. These zones offer businesses specific tax incentives and simplified procedures, making them attractive hubs for trade and investment.
Businesses in these zones benefit from:
- VAT exemptions on goods transferred within and outside the designated zones, provided they meet specific criteria.
- Favorable tax treatment for goods stored, processed, or exported.
However, services within designated zones are generally subject to standard VAT rates of 5%, as regulating service transactions is more complex.
Corporate Tax Policies in Designated Free Zones
The UAE’s introduction of Corporate Tax has brought some critical regulations for companies operating in these areas.
Key Highlights:
- Tax-Exempt Income: Companies operating within specified zones are eligible for a 0% corporate tax rate on qualifying earnings. Qualifying income includes:
- Transactions with other businesses within the designated zone.
- Export transactions meeting compliance requirements.
- Non-Qualifying Income: Transactions with mainland UAE companies may be subject to the standard corporate tax rate of 9%.
- Substance Requirements: Businesses must demonstrate adequate economic substance in the designated zone to qualify for tax benefits, including:
- Having a physical office.
- Employing staff proportional to the scale of activities.
- Maintaining operational independence.
- Compliance: Companies must maintain detailed records to verify eligibility for tax incentives and submit timely corporate tax filings.
Recent Updates to Designated Free Zone Policies
The UAE Cabinet regularly revises the list of designated zones. Under the most recent directive (Cabinet Decision No. 59), the following free zones have been listed:
- Abu Dhabi: Free Trade Zone of Khalifa Port, Abu Dhabi Airport Free Zone, etc.
- Dubai: Jebel Ali Free Zone, Dubai Airport Free Zone, and more.
- Sharjah, Umm Al Quwain, Ajman, Ras Al Khaimah, and Fujairah: Prominent hubs for industrial and trade activities
New policies emphasize strict compliance with Federal Tax Authority (FTA) regulations. Lack of compliance may cause the forfeiture of tax privileges.
Why Choose Designated Free Zones?
Designated Free Zones offer unparalleled advantages:
- Tax-efficient operations.
- Well-placed ports and airports enable connectivity to international markets.
- Simplified customs and regulatory processes.
However, businesses must comply with all applicable laws, including VAT, corporate tax, and customs regulations.
How SMS Consulting Can Help
At SMS Consulting, we specialize in helping businesses navigate the complexities of UAE regulations, including setting up operations in Designated Free Zones. Our services include:
- Business registration and licensing.
- Corporate tax advisory and compliance.
- Assistance with VAT registration and filings.
Let us guide you through every step to establish a compliant and tax-efficient business in the UAE.