Corporate Tax Changes Affect Free Zone
The UAE’s new Corporate Tax rules have left many business owners scratching their heads—especially those in Free Zones. If you run a hardware shop, building materials supply business, or construction trade company in a UAE Free Zone, you might be wondering:
“Does this tax apply to me?”
“Will it hurt my profits?”
“How can I stay compliant without losing my Free Zone benefits?”
Let’s break it down in simple terms, with all the technical details you need—without the jargon.
1. UAE Corporate Tax Basics: What’s Changing?
Starting June 2023, the UAE introduced a 9% Corporate Tax on businesses with profits over AED 375,000. But here’s the key question:
Do Free Zone Businesses Have to Pay?
✅ Yes, but with exceptions.
- Free Zone companies can still get 0% tax—if they meet certain conditions.
- If you do business with mainland UAE clients, you may lose the tax exemption.
Who Does This Affect?
- Hardware shops in Free Zones (like DMCC, JAFZA, DAFZA)
- Building material traders
- Construction suppliers
2. Free Zone Corporate Tax Rules – What Suppliers Must Know
A. The “Qualifying Free Zone Person” (QFZP) Status
To keep your 0% tax rate, you must:
✔ Maintain “adequate” operations in the Free Zone (real office, staff, expenses)
✔ Earn at least 51% of income from “Qualifying Activities” (like trading, manufacturing)
✔ Avoid earning more than 5% from UAE mainland sales
Example: If your hardware store in JAFZA mostly sells to international buyers, you’re likely safe. But if 50% of sales go to Dubai contractors, you could lose the tax benefit.
B. What Counts as a “Qualifying Activity” for Suppliers?
The good news? Most trading and logistics businesses qualify, including:
- Wholesale of construction materials
- Equipment & tool distribution
- Storage & supply chain services
But: If you start doing consulting, real estate, or financial services, you may lose the exemption.
C. What If You Do Business with Mainland UAE Clients?
- Up to 5% of revenue can come from UAE mainland without losing 0% tax.
- Above 5%? You’ll pay 9% tax on mainland profits only (Free Zone income stays tax-free).
Smart Move: If you sell to both Free Zone and mainland clients, keep separate records to avoid unnecessary tax.
3. How This Affects Hardware & Building Material Businesses
A. Impact on Pricing & Profit Margins
- If you lose the 0% tax benefit, your 9% tax bill could force price hikes.
- Solution: Adjust supplier contracts or focus more on export sales to stay tax-free.
B. Compliance Requirements (What You Must Do Now)
- Register for Corporate Tax (if revenue > AED 1 million)
- File annual tax returns (even if you owe 0% tax)
- Keep detailed financial records (to prove Free Zone eligibility)
Pro Tip: Use accounting software like QuickBooks or Xero to track Free Zone vs. mainland sales.
C. Opportunities for Smart Businesses
- Expand exports to keep 0% tax status.
- Set up a mainland branch (if most clients are UAE-based) and pay tax only on that portion.
- Claim deductions (business expenses reduce taxable profit).
4. Next Steps for Free Zone Hardware Suppliers
A. Check Your Free Zone Status
- Contact your Free Zone authority (DMCC, JAFZA, etc.) to confirm if you qualify for 0% tax.
B. Review Your Client Base
- If over 5% of sales are mainland, consider:
- Shifting focus to exports
- Creating a separate mainland company
C. Consult a Tax Advisor
- A UAE tax specialist can help structure your business to minimize tax legally.
Final Verdict: Stay Tax-Smart to Protect Your Profits
The new Corporate Tax rules aren’t all bad—Free Zone businesses can still save money if they plan right. For hardware shops and building material traders, the key is:
✔ Keep most sales as “Qualifying Activities” (export/Free Zone deals)
✔ Track mainland vs. Free Zone income carefully
✔ Register & file returns on time
If you play it smart, you can keep more profits while staying fully legal.
