Corporate Tax in UAE: Should Free Zone Companies be Worried?

The UAE businesses are required to embrace a new form of direct tax in a country that has been hitherto known as a low-tax jurisdiction. The news about the introduction of corporate tax in the UAE has been announced at the end of January 2022 and it will be effective from 1 June 2023. Even though a Federal Law on Corporate Tax is yet to be announced, the Ministry of Finance has published FAQs to guide businesses. Free zone companies are one important group that is keen to understand the implications of corporate tax in the UAE.

Free zones have been the preferred choice of foreign investors due to the light regulations, easy business setup procedures, 100% foreign ownership and lack of taxation. However, the free zone companies are now anxious about whether the corporate tax will crimp the tax incentives they have been receiving so far. Consult with corporate tax consultants in Dubai to keep abreast of any new development in this regard.  Let’s check out how the free zone companies will be affected by the introduction of UAE corporate tax:

Will a free zone business be subject to UAE Corporate Tax?

Free zones businesses are subject to corporate tax in the UAE. The Ministry has stated that the UAE corporate tax regime will continue to honour the corporate tax incentives currently offered by the free zones to investors. However, there is one big catch: the free zone companies should comply with all the compliance requirements and must not do business in the UAE mainland.

What are the Current Free Zone Tax Incentives?

Currently, free zones attract foreign investors by offering a zero corporate tax regime. Companies operating in the free zones are currently subjected to zero per cent corporate tax as well as zero per cent personal income tax. Such incentives have prompted many foreign investors to come into the UAE and start a business in one of the 40 plus active free zones in the country.

What’s the ‘No Business on Mainland’ Condition?

Free zones are conceived as specially designated areas that are regulated by independent free zone authorities with their own separate regulations. Companies operating in the UAE free zones are allowed to carry out trading within the zone limits. They can also trade internationally such as re-exports. As per the information available now, companies following this rule will continue to benefit from corporate tax incentives.

However, free zone companies are allowed to trade in the mainland area by signing an agreement with local distributors. It’s a legal way for free zones to reach the wider mainland market and build a large customer base for their products and services. Certain free zones also offer a Dual License that allows free zone companies to extend their activities to the mainland. Dual Licenses are provided in collaboration with the Department of Economic Development (DED) of the respective emirate. Dual License holders can do business in the mainland from their offices in the free zone. Corporate tax may affect such businesses as well as they carry out business in the mainland. However, we are awaiting more clarity on the matter.

Will a free zone business be required to register and file a Corporate Tax return?

Businesses incorporated in the free zones are required to register for corporate tax in the UAE once it comes into force. In tandem with this, free zone businesses must also file a corporate tax return within the time frame prescribed by the Ministry of Finance. However, the Ministry will issue more details and guidance on UAE corporate tax in due course. The UAE Ministry of Finance also has clarified that the compliance requirements will be the same across all the free zones.

Top Features of Corporate Tax in the UAE

At present, the government plans to levy corporate tax at a 0% rate for taxable income up to AED 375,000. This tax rate is aimed at supporting small businesses and startups in the UAE. A headline tax rate of 9% will apply to taxable income exceeding AED 375,000. Similar to other taxes in the UAE such as the Value Added Tax (VAT), non-compliance will be met with penalties and other forms of punishments. Further information on the UAE corporate tax penalties will be released by the government in due course. Tax agents in Dubai can help you get more clarity on the tax rates.

Consult with the Best Corporate Tax Agents Consultants in Dubai, UAE

Investors are keen to know how the UAE corporate tax will affect their businesses once it comes into force. As of now, the government says corporate tax in the UAE will affect free zone businesses that carry out business in the mainland. However, free zone companies are advised to wait for the promulgation of the UAE corporate tax law to get more clarity. In the meantime, tax Agents in Dubai, approved by the Federal Tax Authority (FTA), such as Jitendra Chartered Accountants (JCA) can provide investors with adequate information on the corporate tax. JCA is one of the leading providers of accounting, audit, and tax compliance services in the UAE. We are committed to helping every business to comply with the legal requirements implemented by the government.