How UAE Coporate Tax is Applicable in UAE Freezone Transactions?

Applicability of UAE Corporate Tax on Free Zone Entities

UAE Corporate Tax is generally applicable to Free Zone entities as well. However, the UAE Corporate Tax regime will honor the Tax Incentives currently being offered to the Free Zone Entities if it satisfies the following two conditions:

1. If such entities maintain the adequate substance in the Free Zone and 
2. If it complies with all regulatory requirements.

The Ministry of Finance released the public consultation document on the proposed UAE Corporate Tax on 28th April 2022. As per this Public Consultation Document, Companies or branches registered in the Free Zones are known as Free Zone Persons (FZP) as per this document. Such Free Zone persons will be within the scope of the new UAE Corporate Tax and are required to file their Tax Return annually.   

This article describes our understanding of the applicability of Corporate Tax for the entities registered in Free Zones in the UAE based on the information available in this public document.

The applicability of UAE Corporate Tax on 10 different types of transactions in a Free Zone Entity

1. Transactions done by a Free Zone company to a business located outside the UAE will be taxed at 0%. That means there is no tax on the profit earned from outside the UAE by a Free Zone company.
2. Profit earned from trading within the same Free Zone will be taxable at 0% only.
3. Similarly, profit earned from trading with entities in another Free Zone in the UAE also will be taxable at 0%.
4. If the Free Zone Person has a branch on the mainland, 9% tax will be applicable for the income earned on its mainland sourced income at the branch. At the same time, only 0% will be applicable for all income other than mainland sourced income for such mainland branch.
5. If the Free Zone person doesn’t have a branch on the mainland, still it will be eligible for 0% tax for the passive income earned from the mainland. The passive income includes interest, royalties and dividends, and capital gains from owning shares in mainland UAE companies.
6. Many companies registered in the Free Zone have group companies on the mainland. Income from transactions with the group companies located in the mainland UAE will be taxable at 0%. However, payments made to the Free Zone Person by a mainland group company will not be a deductible expense in the mainland. It means, indirectly it will be taxed on the mainland at 9%.
7. If a Free Zone person located in a designated zone sells goods to the UAE mainland business and such UAE mainland business is the importer of those goods on records, then the Free Zone Person will be taxed at 0% Corporate tax.
8. Income from certain regulated financial services directed at foreign markets will be taxed at 0%.
9. Any other type of mainland source income earned by a Free Zone Person other than explained from point number one to eight will be Taxed at 9%.
10. Last point, but very important, if the Free Zone Person has PE ie, Permanent Establishment in the mainland UAE, the Free Zone Person will lose the Tax Incentive otherwise would have been eligible for 0% taxation. 

To summarize, it is time to review the existing business models and organizational legal structure for those who are having any business in the Free Zone. Further to optimize the tax benefit, it is important for a business that is registered on the mainland but has business overseas as well. You may have to check whether separating your business activities between the mainland and the Free Zone will result in any tax benefits. 
 
Even though the UAE Corporate Tax is effective from the financial year starting on or after 1st June 2023, Tax planning to ensure the compliance of the law must be done now itself.  

Emirates Chartered Accountants Group is committed to delivering and freely explaining the implications of the introduction of Corporate Tax on your business. We hope our efforts to update you on the key developments in the region would help you to make an informed decision in your business.

Corporate Tax in UAE Free Zones – Applicability
 

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