How Should Free Zone Persons Prepare for the UAE Corporate Tax?

Free zone companies and branches registered in any of the free zones in the UAE (Free Zone Persons) are subject to the UAE corporate tax. Since they are not outside the scope of the UAE corporate tax, free zone persons need to ensure they are adequately prepared for the new tax regime. Since the UAE corporate tax law is yet to be released, free zone persons may find it tough to prepare for the corporate tax regime.

However, they can start preparing with the help of corporate tax consultants in Dubai. UAE corporate tax preparation for free zone persons need not be a grey area as relevant information can be gathered from the Public Consultation Document released by the government. The below blog will further enlighten the free zone persons on how to prepare for the UAE corporate tax:

Free zone persons lagging behind UAE corporate tax preparation can have a quick guide to the applicability of the tax on their income as given below:

  • A Free Zone Person can benefit from a 0% CT rate on income earned from transactions with businesses located outside of the UAE, or from trading with businesses located in the same or any other Free Zone
  • A Free Zone Person that has a branch in mainland UAE will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to benefit from the 0% CT rate on its other income
  • If a Free Zone Person transacts with the UAE mainland but does not have a mainland branch, the Free Zone Person can still benefit from the 0% CT rate if its income from mainland UAE is limited to ‘passive’ income such as interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies
  • The 0% CT regime will apply to transactions between Free Zone Persons and their group companies located in mainland UAE. However, payments made to the Free Zone Person by a mainland group company will not be a deductible expense
  • Free Zone Person located in a Designated Zone for Value Added Tax (VAT) purposes can benefit from the 0% CT rate on income from the sale of goods to UAE mainland businesses provided the Mainland company clears goods from the customs
  • Any other mainland sourced income will disqualify a Free Zone Person from the 0% CT regime in respect of all their income

How a Free Zone Person should Prepare for the UAE Corporate Tax?

Embrace the Changing Tax Landscape

Free zone persons are subject to the UAE corporate tax. Therefore, owners of businesses registered with the free zones should accept the imminent change. Entrepreneurs should ensure that they have a comprehensive understanding of the real picture. Business owners should change their mindset to start operating in a tax-imposed jurisdiction from June 1st 2023. They can seek help from companies providing corporate tax consulting services in Dubai to swiftly transition from a zero-tax jurisdiction to a corporate tax-administered country.

Assess the Impact of Corporate Tax

You need to address serious deficiencies in your organization to comply with the new corporate tax regime. You can start with talent mapping, identifying gaps in your team’s expertise and resolving them through upskilling, training or outsourcing. Consult with experts in the industry to assess the potential impact of the UAE corporate tax on your free zone company’s business operations, financial health or expansion plans.

Get the Financial Statements Audited

Audited financial statements should be at the top of your list to ensure UAE corporate tax readiness. The UAE corporate tax public consultation document explicitly states that the free zone persons must have audited financial statements to benefit from the 0% corporate tax rate. The audited statements must be prepared as per the international financial standards accepted by the UAE such as International Financial Reporting Standards (IFRS).

However, certain free zone persons such as startups and SMEs can use alternative standards to reduce the compliance cost burden. Apart from enjoying tax holidays in the UAE, audited financial statements will help the free zone companies make operational and risk-based decisions regarding internal tax matters.  It will also enable them to prepare for any potential tax audits that may arise in the future. Consult with corporate tax consultants in Dubai for preparing audited financial statements.

Restructure your Business if Necessary

A free zone person can maintain a 0% corporate tax rate status with an appropriate corporate structure. However, corporate tax advisors in Dubai recommend starting the restructuring immediately as it requires extensive planning depending upon the complexity of your business. Since the first financial year begins on or after June 1st 2023, it will be too late for a free zone business restructuring if you delay the planning.

Moreover, a free zone person or group maintaining a mainland entity will be required to its corporate legal structure along with the legal agreements that support the transactions between those entities. If a Free Zone Person at present receives or expects to receive any mainland-sourced income, it must immediately carry out a review to determine the appropriateness of its corporate structure.

Improve the Quality of your Financial Date and Documentation

You should have a look at the quality of your data and documentation and ensure that they meet the compliance requirements. You should identify the gaps in your external and internal reporting with a focus on its quality. Free zone persons must also ensure they are gathering and safeguarding the data appropriately. You can seek the advice of corporate tax consultants in Dubai to make this process smooth.

We can Guide you on UAE Corporate Tax Preparation

The UAE corporate tax preparation can be confusing for free zone businesses as the corporate tax law is yet to be released. However, corporate tax consultants in Dubai such as Jitendra Chartered Accountants (JCA) can make the process easier for you. JCA can advise you on tax implications for your company, transfer pricing, the possibility of tax grouping of the companies to avail tax benefits, restructuring of group companies including foreign subsidiaries/branches, the possibility of foreign tax credits, withholding tax and deduction of expenses and interests etc.

JCA’s corporate tax consulting services in Dubai cover CT Assessment & Advisory Services (one-time or retainer basis), CT Compliance Services & CT Agent Services to Represent to Federal Tax Authority (FTA) of UAE in case of any notices served by FTA. Ensure corporate tax compliance and avoid relevant penalties by availing of JCA’s corporate tax services in Dubai, UAE. Talk to our consultants for tax solutions that you can count on.