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Everything Free Zone Companies Must Know About Corporate Tax

Ever since the government proposed the corporate tax in the UAE, business owners have been anxious about its applicability to free zone companies. Corporate tax consultants in Dubai reckon that their concern has a point as tax incentives were the unique selling point of free zones. As per the UAE corporate tax public consultation document, ‘Free Zone Persons’ will be within the scope of the tax but they can receive tax relief under certain conditions.

In this article, we will address the pressing tax concern of foreign investors planning to start a new business in UAE free zones as well as the companies already operating in the free zones. However, you must note that the UAE Corporate Tax Law is yet to be issued and your decisions must be based on the final Law. Corporate tax advisors in Dubai can assist you in planning for the new corporate tax which may take effect from June 1st, 2023. Read ahead to know the applicability of corporate tax on companies licensed by free zones in the UAE.

Applicability of Corporate Tax on Free Zone Persons

The UAE corporate tax regime describes the companies and branches registered in a free zone as Free Zone Persons. Free Zone Persons will be within the scope of corporate tax in the UAE. It means they will be required to file corporate tax returns in the UAE and meet other administrative requirements. However, the UAE corporate tax regime will continue to honour the tax incentives currently being offered to Free Zone Persons, provided they maintain adequate substance and comply with all the regulatory requirements.

What is the Rate of Corporate Tax for a Free Zone Person?

A Free Zone Person can leverage the 0% corporate tax rate on the income earned from their transactions with businesses located outside the UAE or from trading with businesses located in the same or any other Free Zone. The 0% corporate tax rate will also apply to income earned from certain regulated financial services directed at foreign markets. Corporate tax consultants in Dubai can help free zone companies to assess their corporate tax rates.

Applicability of Corporate Tax on a Mainland Branch

Some companies incorporated in free zones may have a branch in the UAE mainland. The standard corporate tax rate of 9% will apply to the mainland-sourced income of such companies. However, you can still enjoy the 0% corporate tax rate on your other income. Consult with corporate tax advisors in Dubai to know the tax rate of your mainland branch.

Impact on Transaction with Mainland

It is common for Free Zone Persons without a mainland branch to transact with the UAE mainland. Such transactions can still continue to attract the 0% corporate tax rate provided the income sourced from the mainland is limited to passive income. The passive income will include interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies.

Impact on Transactions between Free Zone Persons & Mainland Group Firms

The 0% corporate tax rate will apply to transactions between Free Zone Persons and their group companies situated in the UAE mainland. However, payments made by the mainland group company to the Free Zone Person will not be treated as a deductible expense. This provision is to ensure corporate tax neutrality in such instances.

Impact of UAE Corporate Tax on Designated Zones

The UAE has classified certain free zones as Designated Zones for the purpose of Value Added Tax (VAT). A Free Zone Person registered in a Designated Zone will be able to leverage the 0% corporate tax on income earned from the sale of goods to the UAE mainland businesses that are the importer of record of those goods. Companies incorporated in Designated Zones can avail of corporate tax services in Dubai to determine the tax rate on their transactions.

Will Free Zone Persons Have an Unfair Tax Advantage Over Mainland Firms?

The regime of corporate tax in the UAE has included certain provisions to stop free zone businesses from having an unfair advantage over companies registered on the mainland. Any other income sourced from the mainland will disqualify a Free Zone Person from the 0% corporate tax rate with respect to all their income. A Free Zone Person can also elect to be subject to the 9% standard corporate tax rate at any point in time.

However, it would be an irrevocable election. If a Free Zone Person benefits from the 0% corporate tax rate with respect to the mainland income, such income will be treated as within the scope of withholding tax at a 0% rate. Consult with corporate tax advisors in Dubai to assess the potential impact of corporate tax on your mainland-sourced income.

Documentation Requirements

The UAE Corporate Tax regime will require a Free Zone Person to have audited financial statements if it wants to benefit from the 0% corporate tax rate. 

Corporate Tax Consultants in Dubai can Assist Free Zone Businesses

Consulting with corporate tax consultants in Dubai will come in handy for free zone companies to assess the potential impact of corporate tax on their profits and income. Corporate advisors in Dubai such as Jitendra Chartered Accountants (JCA) can help you to prepare properly for the corporate tax. Our services at JCA as Corporate Tax Consultants in Dubai include CT Assessment & Advisory Services (one-time or retainer ship basis), CT Compliance Services & CT Agent Services to Represent to Federal Tax Authority (FTA) of UAE in case of any notices served by FTA.

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