Is it true that businesses in UAE Free Zones are exempt from paying taxes?

The United Arab Emirates (UAE) and other countries like the Cayman Islands, Jersey, and Cyprus offer attractive business environments for investors, thanks to their tax-friendly policies and free zones.

In the UAE, investors can register a new company in a free zone as a Free Zone Establishment (FZE) or a Free Zone Company (FZC). A juridical person conducting business from a free zone can be considered a free zone person, as long as they have been incorporated in a free zone. These free zones provide efficient infrastructure, initiatives to streamline business setup, and foreign ownership regulations.

The UAE's tax-free status for companies has been a significant factor in its popularity. However, the UAE has recently imposed a 9% tax rate on corporations, which may impact its tax-free status and popularity among expats. Dubai companies that do not meet Free Zone regulations will be subjected to this tax.

Free zone companies do not require the owner to live in the UAE, but a general manager of the company must typically be a resident of the UAE. Jebel Ali Free Zone (Jafza), for instance, boasts an annual trade value of over US$104.2 billion per year.

In the UAE, if income is generated from transactions with other free zone persons, it is considered qualifying income and taxed at a rate of 0%. On the other hand, income generated from transactions with non-free zone persons is taxed at a rate of 9%. A free zone person can be categorised into two types: a qualifying free zone person and a non-qualifying free zone person.

A qualifying free zone person meets adequate substance requirements in the UAE by having enough assets, qualified employees, and proper operating expenses to conduct business activities in a free zone. The UAE's Corporate Tax Law regards tax liabilities based on the difference between a resident 'natural person' and a resident 'juridical person' in UAE law.

Navigating the rules can be confusing, and it's not a process anyone should undergo without help. The effective date for the 9% tax was June 1, 2023, but for those whose fiscal year is the same as the calendar year, they started paying the tax on January 1, 2024.

The Cayman Islands, another tax haven, offers a 0% corporate tax rate and the absence of taxes on income, dividends, or capital gains. Its economy is largely driven by tourism and financial services.

Jersey, a self-governing British Overseas Territory in the Channel Islands, has a 0% corporate tax rate, though property developers and large retailers may face 10-20% rates. Its economy largely relies on the financial sector, particularly banking, trust, and investment services.

Cyprus, a member of the European Union, has a corporate tax rate of 12.5%, one of the lowest in the EU. Its economy is diverse, with sectors such as tourism, shipping, and services making significant contributions.

The Bailiwick of Jersey has implemented tax reforms to avoid being considered a tax haven and to gain access to and acceptance from the world's major economies. It has also introduced a 0% withholding tax rate on payments to foreign companies.

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'. This expansion could attract more tech and creative industries to these tax havens.

The UAE has implemented tax reforms to comply with international standards and gain acceptance from the world's major economies. It has introduced a 9% tax on some corporations, with no tax thus far imposed on individuals. These reforms aim to position the UAE as a competitive business destination that is both tax-friendly and internationally compliant.

In conclusion, the UAE, Cayman Islands, Jersey, and Cyprus offer attractive business environments due to their tax-friendly policies and free zones. However, navigating these tax systems can be complex, and it's essential to seek professional advice to ensure compliance with the regulations.