No, DIFC and ADGM entities (Financial Free Zones) are not fully exempt from corporate tax. However, they may benefit from a 0% corporate tax rate on "qualifying income" if they meet the criteria for a Qualifying Free Zone Person (QFZP).
To benefit from the 0% corporate tax rate, entities must meet the QFZP conditions set in Cabinet Decision No. 100 of 2023.
Entities in DIFC and ADGM should take the following actions:
- Determine QFZP Status, to qualify as a QFZP, an entity must:
Maintain adequate substance (i.e., employees, office space, and operational expenses in the Free Zone); Earn Qualifying Income as per Cabinet Decision No. 100 of 2023; Comply with transfer pricing rules; Not have elected to be taxed under the standard UAE corporate tax regime.
- Identify Qualifying and Non-Qualifying Income, generally Qualifying Income (0% Tax Rate) are:
(i) Income from transactions with other Free Zone Persons.
(ii) Certain income from transactions with Non-Free Zone Persons, if related to Qualifying Activities.
(iii) Revenue from Qualifying Intellectual Property.
In general, Non-Qualifying Income (9% Tax Rate), are the income which are earned from Excluded Activities, which may also include, any revenue derived from the UAE mainland (outside Free Zones), Income from a Domestic Permanent Establishment.
Are Banks in DIFC Allowed to Benefit from the 0% Tax?
No, banking activities are considered "Excluded Activities" and do not qualify for the 0% tax rate.
Under Ministerial Decision No. 265 of 2023, banking activities are explicitly listed as "Excluded Activities", meaning they are subject to the standard 9% corporate tax.
However, banks operating in DIFC may still structure their operations to optimize tax by:
- Establishing subsidiaries or special purpose vehicles (SPVs) to conduct activities that qualify for the 0% rate.
- Ensuring income is generated from transactions with Free Zone or foreign clients to minimize non-qualifying income.
Since banks are classified under Excluded Activities, they generally do not qualify for the 0% corporate tax rate. However, other financial institutions may have certain types of qualifying income:
- Fund Management Services: Managing investment funds regulated within DIFC/ADGM.
- Wealth & Investment Management: Providing discretionary investment management to foreign or Free Zone clients.
- Holding Shares for Investment Purposes: Passive income from holding company shares.
- Treasury & Financing Services: If conducted only for Related Parties.
DIFC and ADGM entities are not fully exempt from corporate tax, but may benefit from the 0% rate on qualifying income if they meet QFZP conditions.
- Entities should evaluate their income sources carefully, ensuring they segregate qualifying and non-qualifying income.
- Wealth management, funds, and holding companies, may still enjoy the 0% tax rate.
Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
