Corporate tax impact on Freezone companies will need a lot of discussions. There are many Free zone entities in the UAE as stand-alone companies and as part of group companies. It is very relevant to how their transactions impact their tax liability.
Freezones jurisdictions have always advertised that companies in the Freezones will not be taxed. It is important to now understand what are the specific regulatory requirements the corporate tax regime has in place for Freezone companies, to ensure proper compliance.
The consultation document issued by the ministry of finance basically states that all Free zone companies are in the scope of corporate taxation. If the Free zone company wants to take advantage of the corporate tax incentives, then they must maintain adequate substance and comply with the regulatory requirements.
Transactions that would benefit from 0% Corporate tax for Free zone companies are as follows-
- Transactions outside the UAE
- Trading in the same Free zone or other Free zones
- Certain regulated financial services directed at foreign markets.
- Passive income earned from mainland UAE. Passive income would include interest and royalties, and dividends and capital gains from owning shares in mainland UAE companies
- Transactions with group entities in the mainland, however, the mainland entity cannot deduct these payments to the Free zone entity.
- For Free zone companies located in designated zones can benefit from 0% corporate tax rate on income from sale of goods to UAE mainland, as long as the mainland company is the importer on record.
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Some other notable points discussed in the Public Consultation regarding Free Zone companies-
- A Free zone company may have a mainland branch that will be taxed at the 9% corporate tax rate on the mainland sourced income, and the Free zone company can continue to benefit from the 0% corporate tax rate.
- Any other mainland sourced income will disqualify the Free zone company from the 0% corporate tax benefits.
- At any point the Free Zone company can take an irrevocable decision to be subject to the regular CT rate.
- If a Free Zone entity has the advantage of the 0% corporate tax rate, the mainland income will be within the scope of withholding tax of 0%. For now there is no impact, however when the withholding tax rate increases, this will make a tax impact.
From the above, it seems logical that if Free zone entities want to do business with the mainland, creating a branch in the mainland to perform the mainland business seems logical.
For professional advice on corporate tax, book an appointment with our tax experts.