Understanding Free Economic Zones: Business in the UAE

2:06 am  |  22.03.2024

We welcome all entrepreneurs and those dreaming of starting a business in the United Arab Emirates. Today, we want to share important information about tax incentives for businesses in Free Economic Zones (FEZs) in Dubai and other regions of the UAE.

Exploring Free Economic Zones and Their Benefits

Free Economic Zones are a key feature of the business environment in the UAE. Here, entrepreneurs can enjoy several privileges, including tax breaks. The variety of Free Trade Zones in the UAE provides unique opportunities for residents wishing to develop a business, depending on their needs and goals.

Advantages of Operating in UAE’s Free Economic Zones

Free Trade Zones in the UAE offer numerous benefits to entrepreneurs. They allow 100% foreign residents to register their businesses and ensure the absence of currency restrictions, freedom of movement of capital, and tax benefits. These factors make operating in Free Economic Zones attractive for various types of businesses.

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From June 1, 2023, the UAE introduced a corporate income tax for companies, affecting some companies resident in Free Zones.

Understanding Tax Benefits and Their Impact

Most SEZs offer a zero corporate tax rate, significantly reducing the financial burden on enterprises, exempting them from paying taxes, and increasing profits. In addition, additional tax incentives may include exemptions from customs duties and individual VAT tax incentives. Currently, in the UAE, VAT is paid quarterly, and reporting is provided within 28 days after the end of the tax period.

Key tax benefits in UAE-free zones include exemption from corporate and personal income tax for a specified period, which can be extended. In addition, entrepreneurs are allowed to repatriate 100% of capital and profits, which provides a significant incentive to invest in the region.

Conditions for Utilizing Tax Benefits

There is an opinion among investors that there are zones that provide a zero tax regime by default and you just need to “look for them better.” But that’s not true. Companies established in free zones will be considered residents for tax purposes, and therefore, by default, they will be subject to the standard approach to income taxation: the first 375,000 dirhams (~$102,000) of taxable income are excluded from taxation, and then a rate of 9% is applied.

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There are specific activities that can still enjoy tax-free status, but they are mostly narrowly focused. For everyone else, three options are available: the standard tax regime, the Qualified Free Zone Person (QFZ) regime, or a special preferential regime for small businesses.

To maximize the efficiency of using tax benefits in free economic zones, it is recommended to seek help from professional consultants.

At the same time, in case if you want to receive tax benefits you should look at the list of requirements:

  • conducts qualifying activities;
  • receives qualifying income from qualifying activity;
  • his non-qualifying revenue does not exceed the de minimis requirement;
  • prepares audited financial statements;
  • maintains an “adequate” level of actual economic presence (substance);
  • makes transactions with affiliates taking into account transfer pricing rules;
  • maintains transfer pricing documentation;
  • did not choose to apply the normal tax regime.

A person who pays taxes in the UAE is not part of a multinational group, or does not have CLSI status, can claim the small business incentive if the income threshold for the relevant tax period and previous ones does not exceed AED 3 million for each period. At the same time, the preferential regime for small businesses should be valid until December 31, 2026, and it is not yet known whether the UAE authorities will extend it.

How Lawyers Can Help

You can choose the free zone yourself. But given the number of different factors that need to be taken into account, it makes sense to involve a lawyer: he will help you navigate and structure your business. Only experienced lawyers and consultants familiar with the specifics of the local market will give comprehensive advice on the most suitable economic zone.

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A lawyer will help you understand and choose a free zone that meets the specifics of the business by type of activity and opportunities for structuring issues of corporate governance and shared ownership. Legal support is important to understand the peculiarities of local corporate regulation and determine the free zone where there is effective and prompt administrative support.

Over the past year, the country’s authorities have issued many decisions and clarifications, which need to be analyzed only in aggregate, comparing some provisions with others, and checking with analyses of practical situations by tax authorities.

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