The Federal Tax Authority (FTA) has announced that businesses must complete Corporate Tax registration within 90 days from the Date of Incorporation / MOA.
UAE corporate tax is expected to be implemented for the fiscal year beginning on or after June 1, 2023. The UAE residents would be subject to tax on their global profits under the proposed UAE corporation tax. Entrepreneurs have been concerned about the corporate tax's applicability to free zone enterprises ever since the government of the UAE proposed it. The corporate tax consultants in the UAE believe their concern is valid since tax incentives are one of the unique selling points of free zones. According to the UAE corporate tax public consultation document, free zone persons will be liable for the tax, but under certain circumstances, they may be eligible for tax reduction.
However, you must consider that the UAE corporate tax law has not yet been released, therefore any decisions you make must be based on the final version of the law. For tax planning, it will be better to get advice from corporate tax advisers in the UAE. Now, let’s dive deeper into the significant things companies must know about free zone corporate tax.
Corporate Taxes on Free Zone Persons
Companies and branches registered in a free zone are referred to as "free zone persons" under the UAE corporate tax framework. Corporate Tax will apply to persons operating within UAE free zones where they are Taxable Persons; all Taxable Persons (including Free Zone Persons) must register for Corporate Tax, obtain a Corporate Tax Registration Number and file a Corporate Tax return for each Tax Period (subject to the FTA’s timelines and guidance). However, as long as they maintain sufficient substance and adhere to all applicable regulations, the UAE corporate tax framework will continue to honor the tax incentives now afforded to free zone persons.
Rate of Corporate Tax for a Free Zone Person
A free zone person may benefit from a 0% corporate tax rate only on its Qualifying Income if it meets the statutory conditions to be a Qualifying Free Zone Person (QFZP) - including the Qualifying Activities test, the Beneficial Recipient requirements, de-minimis thresholds and other substance and arm’s length requirements; the 0% rate is not automatic for all cross-border or intra-free-zone transactions. Free zone businesses should examine their company tax rates with the aid of corporate tax specialists in the UAE.
Professional Corporate Tax Filing Services and expert support for transfer pricing in Dubai play a critical role in ensuring compliance with UAE Corporate Tax laws, accurate determination of Qualifying Income, and adherence to arm’s length and documentation requirements.
Are Free Zone companies eligible for 0% corporate tax?
Whether a given receipt - including passive income or transactions with mainland group companies - qualifies for the 0% rate depends on the FTA’s Qualifying Income and Excluded Activities tests, the Beneficial Recipient requirement and the de-minimis thresholds; there is no blanket rule that mainland payments are automatically non-deductible - deductibility follows the Corporate Tax Law and supporting guidance. A free zone company's other revenue streams will be almost certainly all susceptible to corporate tax.
Corporate Tax on a Mainland Branch
Where a free zone entity has a mainland branch (a Domestic Permanent Establishment), the income attributable to that DPE is taken into account when determining whether the entity qualifies for the Free Zone 0% regime; if the entity fails the QFZP conditions (or elects out) then the standard Corporate Tax rules (including the 9% rate where applicable) will apply. Seeking the help of financial consultants in the UAE will help you know the tax rate for your mainland branch.
Impact on Transaction with the UAE Mainland
Passive receipts (for example, interest, royalties, dividends and capital gains) are subject to the Guide’s Qualifying/Excluded Activities tests and the Beneficial Recipient requirement - they are not automatically within the 0% regime simply because they are passive or arise from mainland counterparties.
Corporate Tax's Impact on Designated Zones
Some free zones are designated for VAT purposes and some of those may be considered as Designated Zones for Corporate Tax purposes; however, the VAT ‘designated zone’ rules do not automatically determine Corporate Tax 0% treatment - entities should check the official lists and the FTA’s Free Zone Persons Guide and consult their Free Zone Authority. To calculate the tax rate on their transactions, businesses incorporated in designated zones may use corporate tax services in the UAE.
Who Can Help You?
Being one of the Top Accounting and Auditing Firms in the UAE, Reyson Badger can help you prepare corporate tax. With a team of financial experts, we can help free zone businesses evaluate corporate tax's potential effects on their revenues and earnings. Free zone business or not, having your accounts audited accurately is necessary for the smooth running of your business. We, at Reyson Badger, provide a plethora of accounting services. From accounting, bookkeeping, and forensic audit to corporate tax assessment, our expert team provides top-notch services to our clients. If you are a free zone person on the lookout for a professional tax accounting firm in the UAE, Reyson Badger is the right choice!
