The free zones in the UAE are a magnet for EU and North American companies that are looking for growth opportunities in the Middle East and even globally. The UAE economic free zones provide myriad benefits such as 100% foreign ownership, significant tax benefits, and a business-friendly regulatory environment. The UAE’s strategic location at the meeting point of global trade routes makes it a favourable jurisdiction for offshore operations and a preferred jurisdiction for businesses when it comes to maximizing your corporate taxation plan.
For EU businesses established in the UAE and North American companies taking advantage of the free zone benefits, the real attractor is the seamless link between the regulatory benefits and the Double Taxation Avoidance Agreements (DTAAs) in place. This framework minimizes the tax burden whilst complying with international standards.
This article will provide an overview of the free zone framework, corporate taxation schemes available to companies, and tax advantages as a component of the corporate system, along with actionable insights for companies seeking to operate and grow in these dynamic business jurisdictions
What Are the Key Features of UAE Free Zones?
The UAE’s appeal to foreign investors is significantly boosted by its free zones, which provide a number of benefits like 100% foreign ownership, profit repatriation, and exemptions from customs duties.
1. Foreign investors can own 100% of their company
UAE Free Zones offer foreign investors the opportunity to own 100% of their company without needing a local partner. This full ownership is a significant advantage, as mainland companies in the UAE often require a local shareholder (in some restricted sectors) to own at least 51% of the company shares. This makes Free Zones a secure and attractive option for foreign investors looking to establish a presence in the UAE.
2. Foreign investors can transfer their companies’ profits to their home country
The ability of a company to transfer profits from its foreign operations back to its home country is known as profit repatriation. UAE free zones offer businesses the advantage of 100 % profit repatriation, which is attractive to foreign investors.
3. Foreign Companies can import goods without customs duties
Free zone licensees are allowed to import goods or equipment from a foreign country into the free zone without payment of customs duties. Customs duty is only paid when goods that were imported into the UAE are moved out of the free zone.
What Is Tax Residency and Its Implications?
The concept of tax residency serves primarily to link a person, whether an individual (Natural Person) or a legal entity (Juridical Person), to a particular jurisdiction for taxation. Tax residency is distinct from residency for immigration or other purposes. Simply holding a residence permit or having the right to reside in the UAE doesn’t automatically qualify someone as a Tax Resident.
The criteria for determining a “Resident Person” for corporate tax purposes are also different from those used to establish residency based on citizenship, domicile, or habitual residence.
Residency Under Corporate Tax Law
A Juridical Person is a Resident Person for UAE Corporate Tax purposes if:
- It is incorporated or otherwise established or recognised under the applicable legislation of the UAE, irrespective of where its effective management and control are exercised, or,
- It is incorporated or otherwise established or recognised under the applicable legislation outside the UAE, but its effective management and control are exercised in the UAE.
A Juridical Person who is a Resident Person is subject to Corporate Tax on its Taxable Income derived from inside and outside the UAE (worldwide income). This means that a Juridical Person who is a Resident Person is taxed on all income earned, irrespective of whether the income is sourced in the UAE or a foreign country. Whereas a Non-Resident Person is generally only subject to Corporate Tax on income sourced in the UAE.
Examples include:
- Company A is a media outlet that was established under UAE Commercial Companies Law as an entity with a separate legal personality. As a juridical person established under the laws of the UAE, Company A is a Resident Person for Corporate Tax purposes.
- Company B is a limited company incorporated in Country B. However, in 2024, Company B was effectively managed and controlled in the UAE and, therefore, considered a Resident Person for Corporate Tax purposes. As a consequence, the worldwide income of Company B was subject to UAE Corporate Tax.
- The Corporate Tax Rules for a Juridical Person also apply to free zones. Therefore, if a Juridical Person is incorporated or formed in a free zone in the UAE, the Juridical Person is also a Resident Person for Corporate Tax purposes.
UAE Domestic Tax Residency
Meeting the criteria of the UAE domestic tax residency will mean that the Person is a Tax Resident. Upon a successful application to the Federal Tax Authority, this will be evidenced by the issuance of a Tax Residency Certificate.
A Juridical Person is considered to be a Tax Resident of the UAE if it is:
- It is incorporated or otherwise formed or recognised in the UAE or,
- It is otherwise considered a Tax Resident of the UAE under other Tax Laws in the UAE (for example, the UAE Corporate Tax Law)
Examples include:
- Company C is an LLC incorporated in the UAE. As a Juridical Person who is incorporated in the UAE, Company C is a UAE Tax Resident.
- Company D is a company incorporated in, and effectively managed and controlled in Country D. Company D does not have a physical presence or a dependent agent in the UAE but it has many customers in the UAE from whom it derives a significant portion of its worldwide revenue. Company D is not a UAE Tax Resident even though it derives substantial revenue from the UAE.
The UAE tax residency rules for a Juridical Person equally apply to free zones. Therefore, if a Juridical Person is incorporated or otherwise formed in a free zone in the UAE, this juridical person is a UAE Tax Resident and can apply for a Tax Residency Certificate (TRC).
Tax Residency of Foreign Companies With UAE Branches
A UAE branch of a Juridical Person is an extension of its parent or head office and is not considered a separate legal entity in its own right. Therefore, a UAE branch of a foreign company (that is incorporated and effectively managed and controlled in a foreign jurisdiction) is not considered to be a Tax Resident Person.
If, however, the foreign company (that is incorporated in a foreign jurisdiction) is effectively managed and controlled in the UAE, the foreign company (along with its branches) is considered to be a Resident Person for the purposes of the Corporate Tax Law and, therefore, Tax Resident in the UAE.
International Tax Treaties and Agreements
Double Taxation Avoidance Agreements (DTAAs) are international international tax agreements that aim to prevent double taxation of income by ensuring that income earned in a foreign country is not taxed again in the individual’s home country. UAE has signed DTAAs with a number of European countries and North American companies.
Each DTAA has its own rules and criteria for determining when juridical and natural persons are considered to be tax residents in the countries that are party to the DTAA. These may differ from the criteria for determining who is a UAE Tax Resident under domestic law or a Resident Person under Corporate Tax Law. Therefore, each scenario should be considered on a case-by-case basis and in light of the wording of the specific DTAA.
A DTAA that is in force in the UAE takes precedence over the provisions of any domestic law. Therefore, meeting the definition of a Resident Person under the Corporate Tax Law does not automatically mean that a Resident Person will be considered a Tax Resident in the UAE for the purposes of a DTAA UAE.
One key feature of DTAAs is the rules that determine in which country the juridical person is a tax resident. Under an applicable DTAA, tax residence may be assigned to the UAE or to another jurisdiction, depending on the facts and circumstances and the residence criteria of the relevant agreement.
If a juridical person is considered to be a tax resident in the UAE under the applicable DTAA, it is eligible to apply for a Tax Residency Certificate (TRC) in the UAE to obtain the benefits of the applicable DTAA, if required.
2025 Corporate Tax Updates and VAT Considerations
Corporate Tax
In January 2022, the UAE introduced federal Corporate Tax on business profits, which marks a shift from the UAE’s long-standing reputation as a zero corporate tax jurisdiction. Under the Corporate Tax Law, UAE a 9% standard statutory rate is applicable, with a 0% rate for taxable profits up to AED 375,000.
The Law applies to all businesses and commercial activities in UAE (including free zones), except for the extraction of natural resources, which remains subject to Emirate-level corporate taxation.
VAT Law
UAE has recently introduced an eInvoicing system that will enable the immediate exchange of invoices and ensure seamless tax reporting to the Federal Tax Authority. The system is expected to bring significant benefits to both businesses and government entities by simplifying, standardising, and automating invoicing processes.
The amendments in VAT Laws have updated the definitions of “tax invoice” and “tax credit note” to include electronic invoices. It also adds new definitions for electronic invoices and electronic credit notes.The amendments further confirm that VAT refunds will be based on eInvoicing compliance requirements, where applicable. Businesses subject to the eInvoicing system, in line with the phased roll-out strategy, will be required to issue invoices and credit notes electronically and archive electronic invoice data to meet record-keeping standards.
Conclusion and Strategic Recommendations
UAE free zones remain a powerful tool for market access and business optimisation, providing EU and North American companies advantages in tax residency frameworks, DTAAs, and corporate tax regulations. Aligning tax strategy with regulatory incentives can improve businesses’ financial efficiency and reduce compliance risks.
Leveraging the UAE’s business-friendly climate would need extensive strategic planning, strong legal compliance, and a clear awareness of business tax implications. For long-term success and to minimise exposure, companies should seek customized tax advisory in the UAE with experienced legal professionals for long-term success who understand the compliance strategy and international tax law.
Get Expert Legal Advice on UAE Free Zones and Corporate Taxation with SK Legal
UAE free zones offer unmatched advantages for international businesses. At SK Legal, we offer expert legal guidance to help you understand the complexities of UAE tax residency, free zone regulations, and corporate tax compliance. Our services include:
- Comprehensive Legal Consultancy: Our expert team provides clear, personalised legal advice on free zone incorporation, tax residency, and international tax agreements.
- Efficient Policy Review and Implementation: We help businesses create and update contracts, tax strategies, and compliance policies that align with UAE Tax Laws and regulations.
- Specialised Legal Support: Our experienced lawyers are equipped to handle all aspects of tax advisory, risk mitigation, and regulatory compliance for free zone companies.
For personalised assistance and expert legal advice on UAE Free Zones and Corporate Taxation, contact us at [email protected]
Frequently Asked Questions (FAQs) About About UAE Free Zones, Corporate Tax, and VAT UAE
Disclaimer
This publication does not provide any legal advice and it is for information purposes only. You should not rely upon the material or information in this publication as a basis for making any business, legal or other decisions. Therefore, any reliance on such material is strictly at your own risk.
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