Are companies in UAE Free Zones subject to Corporate taxes?

Free Zone persons means companies and branches registered in a UAE Free Zone

Various free zones have offered a corporate tax-free, business-friendly environment to Free Zone Persons. Many companies were set up in Free Zones to avail of these tax-free benefits. Businesses have invested large capital and committed their time and resources to scale up the business.

Now that the UAE is introducing corporate taxes:

• what will happen to the companies in Free Zones?
• whether they will end up paying corporate taxes like any other companies in the UAE?
• are there any special benefits or treatment in offer for their income?

These were the questions bothering the investors of the Free Zone companies.

Here is our attempt to help you understand the new tax laws proposed to be introduced soon

The UAE's Ministry of Finance has released a public consultation document. The document contains information and primary aspects of the proposed UAE CT regime. The purpose of the document is to seek the views and comments of business communities and other interested parties. Interested people may provide their comments on or before 19 May 2022.

According to the Ministry of Finance, the UAE CT regime will honor the tax incentives offered to the Free Zone Persons. With conditions.

1. Are free zone persons exempt from UAE Corporate Tax?

No, a free zone person is not exempt from UAE CT.

However, a Free Zone Person is subject to a 0% CT rate. To get these benefits the Free Zone Person must meet certain conditions. The conditions are:

• maintain adequate substance in the Free Zone (office premises, employees, decision making, etc)
• comply with all regulatory requirements
• file tax returns and submit Audited financial statements
  
  

2. What income of free zone persons qualifies for a 0% CT rate? 

To avail 0% rate, a Free Zone Person must maintain proper books of accounts, systems, and controls and prepare Annual financials statements to properly arrive at the accounting income. The below three scenarios helps to understand the taxability.

a. Free Zone Persons who do not have a branch in the UAE mainland

0% CT rate will be applicable for Free Zone Person for the income earned from the following activities.

• businesses located outside of the UAE
• businesses in the same Free Zone or
• business from other Free Zones in the UAE 
• certain regulated financial services directed at foreign markets
• for Free Zone person located in a Designated Zone for Value Added Tax (VAT) purpose and earns income from the sale of goods to mainland importer on records for Customs and VAT purposes
• earns only passive income (interest, royalties, dividends, and capital gains) from mainland UAE companies
  
  

b. Free zone persons who have a branch in the UAE mainland

• branch income will be subject to a 9% CT rate
• the free zone income will continue to be taxed at a 0% CT rate

Key requirement: The Free Zone Person must maintain proper books of accounts for its UAE mainland branch.

c. Free zone persons dealing with their group companies in the mainland

• transaction between Free Zone Person and their group companies located in the mainland UAE are also subject to a 0% CT rate.
• however, payments made to the Free Zone Persons by their mainland group companies will not be a deductible expense for the mainland group companies.

3. Are there any other requirements for a Free Zone Person to claim a 0% CT rate?

Yes the following are the other conditions:

• free zone person will have to file its CT return within the due date.
• must submit audited financial statements.

The Wrap

Many businesses in the UAE operate multiple branches/subsidiaries. Some in the Free Zones and some more in Mainland. To conduct business both within and outside of the UAE. Inter-company transactions between these companies are common.

Now is the time for a Free Zone Person to review and evaluate their commercial activity and transactions. Even insignificant transactions may have an unwarranted impact on the tax liability.

Secondly, businesses may have to reconsider their ownership structure. To take advantage of benefits such as loss carry forward, intra-group of assets transfers.