Category: UAE Corporate Tax

Is UAE Free Zones Subject to Corporate Tax?

Free Zones are an important part of the UAE economy and have been central to achieving the country’s aim of encouraging foreign direct investment and enhancing the ease of doing business.

Whilst companies and branches that are registered in a Free Zone (hereafter referred to as “Free Zone Persons”) will be within the scope of the UAE CT and subject to tax return filing requirements, the UAE CT regime will honor the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements.

In line with the original intention and purpose of Free Zones, 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 of any other Free Zone. The 0% CT rate may also apply to income from certain regulated financial services directed at foreign markets.

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.

Where a Free Zone Person transacts with mainland UAE but does not have a mainland branch, the Free Zone Person can continue to benefit from the 0% CT rate if its income from mainland UAE is limited to ‘passive’ income. This would include interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies.

The UAE wishes to maintain its status as the leading regional hub and headquarters location and, therefore, the 0% CT regime will also apply to transactions between Free Zone Persons and their group companies located in mainland UAE. However, to ensure the CT neutrality of such transactions, payments made to the Free Zone Person by a mainland group company will not be a deductible expense.

Finally, a 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 that are the importer of record of those goods.

To prevent Free Zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE, any other mainland sourced income will disqualify a Free Zone Person from the 0% CT regime in respect of all their income.

A Free Zone Person will at any point in time be able to make an irrevocable election to be subject to the regular CT rate.

Where a Free Zone Person benefits from the 0% CT regime in respect of mainland sourced income, such income will be within the scope of withholding tax (to be applied at 0%).

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News Courtesy: Public Consultation Document UAE Corporate Tax

Who will be subject to UAE Corporate Tax (CT)?

On 31 January 2022, the Ministry of Finance announced that the United Arab Emirates (UAE) will introduce a federal Corporate Tax (CT) on business profits effective for financial years starting on or after 1 June 2023. Since the announcement, work has continued on the finalization of the UAE CT regime to ensure that it incorporates best practices globally and minimizes the compliance burden for businesses.

Recognizing the importance of consultation with the business community and other interested stakeholders, the Ministry of Finance is launching this initiative ahead of the official release of the UAE CT legislation.

Making a submission   

The Ministry of Finance welcomes comments on this consultation document by 19th May 2022, using the online submission form FORM LINK.

The Ministry of Finance would appreciate clear and concise comments with, where possible, examples, data, or other information to support views on the main features and implementation of the UAE CT regime.

Interested parties are encouraged to focus their comments on aspects of the proposed CT regime that may help to reduce compliance cost and complexity, and improve certainty for both businesses and the tax administration. Interested parties can also provide comments on other areas

Any comments received after 19th May 2022 or that are submitted in any manner other than by using the prescribed online submission form will not be considered.

Submissions will remain confidential and will not be published or shared with any other Government department.

Who will be subject to UAE CT?

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News Courtesy: Public Consultation Document UAE Corporate Tax