The recent implementation of corporate tax laws in the UAE has reshaped the fiscal landscape, particularly impacting free zone entities. Understanding the criteria for qualifying as a free zone person, and thereby enjoying exemptions from corporate tax, is crucial for businesses operating within this evolving regulatory framework.

A free zone person, encompassing juridical entities within free zones, must meet several conditions to be exempt from corporate tax. These conditions include maintaining substantial operations within a free zone, refraining from voluntary inclusion under the corporate tax law, and compliance with the “Arm’s Length Principle” and “Transfer Pricing Documentation”.

The Arm’s Length Principle ensures fairness in transactions between related parties, while Transfer Pricing Documentation methods help determine taxable income. Qualifying income, as defined by Cabinet Decision No. 55 of 2023, includes revenue from transactions within free zones and certain transactions with non-free zone entities, provided they meet specific criteria.

Crucially, non-qualifying revenue must not exceed de minimis requirements. The de minimis requirement means that if non-qualifying revenue in a tax period is less than 5% of total revenue or Dh5,000,000 (whichever is lower), it is considered satisfied. This safeguard ensures that entities primarily engage in qualifying activities.

Tax rates vary based on income thresholds. For qualifying income, a 0% tax rate applies, while a 9% rate is applied to certain non-qualifying activities. Additionally, entities must prepare audited financial statements, enhancing transparency and accountability within the tax framework.

The UAE’s commitment to fair and transparent tax practices is evident in the implementation of differentiated tax rates and the emphasis on compliance with international standards. The introduction of de minimis requirements offers flexibility to free zone entities, provided they adhere to specified criteria.

As businesses navigate this new regulatory landscape, collaboration with tax authorities and a proactive approach to meeting outlined criteria are essential. By ensuring compliance with tax laws and maintaining transparent financial practices, entities can mitigate risks and seize opportunities for sustainable operations in the UAE.