With the introduction of the UAE’s Federal Corporate Tax regime, effective from June 1, 2023, the country has entered a new era of fiscal responsibility. While the UAE historically offered a tax-free environment, the move to introduce a corporate tax is aimed at aligning with global tax standards and boosting the nation’s non-oil revenue.
This detailed blog provides an in-depth look into who is subject to corporate tax in the UAE across the three primary business structures: Mainland, Free Zone, and Offshore companies. Understanding your tax obligations under the new rules is crucial for compliance, financial planning, and strategic decision-making.
Overview of the UAE Corporate Tax Framework
As per Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, corporate tax in the UAE is applicable to taxable income exceeding AED 375,000. The general rate is 9% above this threshold, while income below is taxed at 0% to support small businesses and startups.
However, tax applicability depends significantly on the type of legal structure, business activity, and the location of registration — i.e., whether the business is in the Mainland, a Free Zone, or an Offshore jurisdiction.
1. Corporate Tax for Mainland Companies
Mainland companies are registered under the UAE’s Department of Economic Development (DED) and are allowed to operate across the UAE without restrictions. These entities are subject to the full force of the corporate tax regime.
Who is Liable?
- All mainland companies with taxable income exceeding AED 375,000.
- Branches of foreign companies operating in the UAE mainland.
- Natural persons engaged in commercial business if they cross the income threshold.
Key Considerations
- All income generated from domestic and international sources is taxable.
- Transfer pricing and related party disclosures must be followed.
- Proper financial statements and records must be maintained for tax filing.
2. Corporate Tax in UAE Free Zones
Free Zones are designated areas that were historically exempt from corporate tax. However, under the new rules, Free Zone entities are also brought into the tax net, with specific provisions for those qualifying as “Qualifying Free Zone Persons.”
Who is Subject to Tax?
Free Zone companies must comply with corporate tax law, but they can enjoy a 0% tax rate on qualifying income if they meet specific conditions.
Criteria for 0% Tax Rate
- Maintaining adequate economic substance in the Free Zone.
- Deriving income from transactions with other Free Zone persons or from qualifying activities (such as international trading, warehousing, or manufacturing).
- Not electing to be subject to 9% tax.
If a Free Zone company fails to meet these criteria, it will be taxed at the standard 9% rate like mainland businesses.
Mixed Income Scenarios
If a Free Zone business earns income from both qualifying and non-qualifying activities (e.g., dealing with mainland clients), only qualifying income remains at 0% if clear separation is maintained. Otherwise, the entire income may be subject to 9% tax.
3. Corporate Tax and Offshore Companies
Offshore companies are typically used for holding assets, international trading, or financial investments. They are not permitted to operate business within the UAE.
Who Is Affected?
- Offshore companies that are tax residents in the UAE may be subject to corporate tax.
- If they generate income from UAE sources or hold UAE-based investments, tax liability may arise.
- Passive income like dividends, interest, or capital gains may be taxed depending on structuring.
Key Offshore Jurisdictions
Common offshore jurisdictions include JAFZA Offshore, RAK ICC, and Ajman Offshore. Though they maintain a degree of anonymity and tax optimization, they are not immune from scrutiny under the new UAE tax laws and global BEPS (Base Erosion and Profit Shifting) regulations.
PEAK Business Consultancy Services – Your Trusted UAE Tax Partner
PEAK Business Consultancy Services is a leading UAE-based VAT and corporate tax consulting firm offering expert guidance to businesses navigating the evolving UAE tax environment. Whether you’re a startup on the mainland, a tech firm in a Free Zone, or an offshore holding entity, our team helps you comply with the Corporate Tax Law efficiently.
- Tax structuring and entity classification
- Corporate tax registration and compliance
- Advisory on Free Zone eligibility and 0% tax optimization
- International tax planning and BEPS compliance
- Audit preparation and documentation support
Click here to contact PEAK Business Consultancy Services and safeguard your business with the right tax strategy.
Are Individuals and Freelancers Affected?
Natural persons conducting business activities (freelancers, consultants, online sellers, etc.) may also fall under the scope of corporate tax if their annual net profit exceeds AED 375,000. Hobbyists or those earning income through employment or personal investments are not affected.
Exempt Persons Under the Corporate Tax Law
Not all entities are subject to corporate tax. Exempt categories include:
- Government entities and their wholly owned subsidiaries
- Extractive and non-extractive natural resource businesses (with Emirate-level taxation)
- Public benefit entities
- Investment funds (if approved)
- Pension and social security funds
Importance of Early Compliance
Corporate tax registration is mandatory for all taxable persons and even for Free Zone entities who want to claim the 0% rate. Late registration can result in administrative penalties. Moreover, accurate financial statements, tax return filing, and proper documentation are crucial for audit readiness.
Conclusion
Corporate tax in the UAE applies differently to mainland, free zone, and offshore companies. Understanding your tax position, qualifying status, and compliance obligations is the first step toward sound financial governance and strategic planning.
Whether you operate within the mainland or a free zone, or manage offshore structures, PEAK Business Consultancy Services ensures you’re fully compliant, tax-optimized, and prepared for the future.
Visit www.peakbcs.com to get professional assistance tailored to your business type and structure.
