Are UAE Free Zone Companies Still Tax-Free?

Indulgent, fascinating, and progressive are just some of the words you could use to describe Dubai, the jewel in the crown of the United Arab Emirates (UAE). With its unfeasibly large skyscrapers, gigantic shopping malls, high-end apartments, luxury supercars, and zero personal tax, it’s little wonder Dubai is a hot destination for expats. 

The UAE is also one of the world’s fastest-growing business destinations. Its approach to making business easy to conduct, world-class infrastructure, strong government support and strategic location attract entrepreneurs from across the globe. 

Without a doubt, the UAE’s tax-free status for companies was the main reason underpinning its popularity.

However, as the UAE imposes a new 9% tax rate on corporations, its tax-free status and popularity among expats are under threat. 

It may come as a surprise to many that a jurisdiction like the UAE is introducing corporate tax but the move should be understood in the context of broader global tax changes. 

Pressure from the influential Group of Seven (G7) and Group of Twenty (G20) major world economies is ramping up for countries to move away from no-tax systems. So, the UAE’s decision to introduce corporate tax has been viewed as a move to maintain its status and reputation as a global commercial hub. 

The move also has the strategic goal of diversifying the UAE’s income sources beyond the oil revenues that account for around 30% of its total gross domestic product (GDP).

However, as with all headlines, it’s too tempting and much too easy to take them at face value and assume that the tax-free UAE is dead – it’s more complicated than that. 

The reality is that instead of zero taxes on all corporations, there will be a two-tier system where some pay 9% tax and others, depending on their activities, are still exempt. 

Companies that do business in the UAE or with other UAE-based entities are now subject to this 9% tax. If you are an international firm that conducts your business outside of the UAE and undertakes ‘qualifying’ activities in the ‘free zone’ you’re incorporated, you will be exempt from this 9% tax.

We’ll return to the activities that qualify and are excluded later, but for now, let’s clarify what a free zone company means. 

What is a UAE Free Zone Company?

The UAE offers investors more than 40 multidisciplinary free zones in which expatriates and foreign investors can fully own companies. Free zones are characterised by highly efficient infrastructure and distinct services that save businesses time, costs and effort. They provide initiatives to streamline business setup and foreign ownership regulations in designated zones.

For example, the Jebel Ali Free Zone (Jafza) is both a community and ecosystem where industries such as logistics, e-commerce, petrochemicals, and others have created an annual trade value of over US$104.2 billion per year. Jebel Ali, at the city’s edge, is only one of a series of free zones.

These are not all in Dubai; some high-level free zones are in Dubai, but others are across the country. Investors can register a new company as a Free Zone Establishment (FZE) or a Free Zone Company (FZC). An FZE has one shareholder and an FZC has two or more and is governed by the rules and regulations of the free zone in which it is established.

Free zone companies do not require the owner to live in the UAE as the system offers 100% foreign ownership; however, in most cases, a general manager of the company must be a resident of the UAE.

Corporate Tax Changes in Dubai 

The UAE wants access to and acceptance from the world’s major economies. It has implemented tax reforms not to be considered a tax haven and therefore blacklisted by potential trading partners. It has thus introduced a 9% tax on some corporations, with no tax thus far imposed on individuals. 

The effective date for the 9% tax was June 1, 2023. However, for those whose fiscal year is the same as the calendar year, they started paying the tax on January 1, 2024.

Despite the tax changes, a free-zone company can maintain a 0% tax rate by meeting certain conditions. The new corporate tax rate applies to foreign entities and individuals not falling under the qualifying income bracket. 

This qualifying income is subject to 0% corporate tax as determined by the business activity or transaction within the free zone. A relatively complex set of criteria determines what is and isn’t qualifying income. 

Navigating the rules can be confusing – it’s not a process anyone should undergo without help. At Nomad Capitalist, our team of worldwide professionals works to provide you with unparalleled expertise. Find out more here. 

UAE Free Zone Qualifying and Excluded Income 

The new UAE corporate tax regime sets out rules based on the nature of a company’s activities, customer base and assets. When considering these measures, the jumping-off point is to understand the basic concept which underpins the UAE’s Corporate Tax Law regarding tax liabilities – the difference between a resident ‘natural person’ and a resident ‘juridical person’ in UAE law:

• Natural Person: Someone who works independently as a freelancer, sole establishment or civil company.
• Juridical Person: Someone who conducts business through corporate entities such as Limited Liability Companies. 

Persons conducting business from a free zone are classified as free or non-free zone persons. On this basis, even if they conduct their business from a free zone, natural persons are not recognised as free zone persons under UAE tax laws. A juridical person can be considered a free zone person as long they have been incorporated in a free zone.

Furthermore, a free zone person can be categorised into two types:

• A qualifying free zone person who meets certain conditions can enjoy 0% tax on qualifying income. 
• A non-qualifying free zone person who does not meet the specific conditions may not access the same tax benefits or exemptions. 

A qualifying free zone person meets adequate substance in the UAE by having enough assets to conduct business activities in a free zone, enough qualified employees to conduct such activities, and proper operating expenses to conduct such activities. 

Under UAE tax regulations, business activities for free zone taxability are divided into qualifying and excluded activities. 

Qualifying activities include, for example, things like manufacturing and processing of goods or materials, holding shares and other securities, fund management services, wealth and investment management services, logistics services along with financing and leasing of aircraft. 

Meanwhile, excluded activities include transactions with natural persons, banking, insurance, finance and leasing, ownership or exploitation and immovable property. They don’t include fund management services, wealth and investment management services, logistics services and financing and leasing of aircraft.

In terms of intellectual property, the definition of qualifying income has been expanded to include ‘Income derived from the ownership or exploitation of qualifying intellectual property’. The inclusion seems to target companies who generate income from intellectual property – but not trademark royalties – and carry out research and development themselves or via a third party.

In basic terms, qualifying income comprises income from all transactions except those derived from excluded activities or with non-free zone persons and means:

• If the income is generated from transactions with non-free zone persons, it is taxed at a rate of 9%.
• If the income is generated from transactions with other free zone persons, it is considered qualifying income and taxed at a rate of 0%.

Finally, even though a free zone entity might have certain non-qualifying revenues if they are less than 5% of total revenue, they can still be considered qualifying. 

Do You Still Want to Incorporate in the UAE?

Even though it’s still possible to pay zero corporate tax in the UAE, things are becoming more complex. Our view at Nomad Capitalist is that UAE free zone companies were primarily designed to be used for people who live there. 

Some things are frustrating to do remotely. While setting up and maintaining a UAE-free zone company is relatively easy, other aspects, like opening a bank account, are a hassle unless you have a residence permit. 

Unless you like Dubai or Abu Dhabi and want to live there, the financial incentives to move your company there are diminishing. While there are better options in terms of taxes, the UAE is still competitive at 9% corporate tax, but qualifying for 0% has become more complicated.

Many companies won’t have so-called qualifying activity to remain at zero tax. And if you do not have a qualifying activity, our assessment and the estimate of numerous tax professionals we work with in the UAE is that you will now pay 9%.

Making a case for the UAE before it imposed a 9% corporate tax regime was much more straightforward. It was a lot easier to state Dubai’s benefits than other tax-free jurisdictions.

Less so now.

Incorporating your company offshore, no matter the tax rate, does not necessarily change your tax status, and where you live is going to impact your company. So, it’s vital to remember that your personal and business taxes are interlinked and to optimise both. You need the right mix of locations.

We call it our tax-friendly quadrant. You have to ensure that you get the full benefits of moving your company offshore, whether in the UAE or anywhere else. 

So, do you want to live in Dubai or the UAE?

If the answer is yes and you really want to live in Dubai, not for the tax benefits, but because you are here, you may be better off paying the 9%. Alternatively, you can live in Dubai with no personal tax and have your company in a zero-tax jurisdiction such as the British Virgin Islands. 

In reality, if your goal is reducing corporate tax, there are places where you can go and pay less than in Dubai. There are places in Europe where you can live and, if appropriately structured, pay less than 9%. 

So, if you want to avoid living in the UAE, you can go to other places and use multi-part company structures to minimise corporate tax. You’ll also have all the travel and lifestyle benefits you need. 

You can become a resident of Italy and avail yourself of its special lump-sum tax regime. You can enjoy favourable corporate tax rates in Malta, Cyprus, Bulgaria and Ireland, where, with appropriate planning, you’ll pay as little as in the UAE.

Whatever your next step is, you’ll need to plan it carefully. That’s where Nomad Capitalist comes in. We can help you determine where to live and put your companies. 

We help seven- and eight-figure entrepreneurs and investors create a bespoke strategy using our proven methods. We’ll help you keep more money, create new wealth faster, and be protected from whatever happens in three steps. 

At Nomad Capitalist, we have a worldwide network of lawyers, estate agents, accountants, and tax and company formation specialists. All that expertise and real-world experience come together when we advise clients on their bespoke and comprehensive action plans. Discover how we do things here.