Freezone Companies: Untangle the Corporate Tax Maze and Maximize Profits!

Freezone Companies: Untangle the Corporate Tax Maze and Maximize Profits!

Scritto da MP

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Categorie: News

Pubblicato il June 22, 2023

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Are you a free zone company wondering about the implications of corporate tax?

Learn how to navigate the new tax regulations while keeping your profits intact.

From June 1, 2023, the United Arab Emirates will implement the Corporate Tax, a new tax that will be levied on company profits at a rate of 9%. Will companies established in one of Dubai’s free zones and other Emirates be required to pay this tax or not? This article aims to answer this question correctly and dispel any doubts or overly superficial interpretations, especially those propagated by those who “sell” companies in free zones, claiming that free zone companies will not have to pay this tax under any circumstances.

Table of Contents

  1. Updates and clarifications on the new Corporate Tax in the UAE
  2. The new Corporate Tax and companies in free zones
  3. Free zone companies and Corporate Tax: key details in Brief
  4. Startups, small and micro enterprises in Dubai: new tax advantages
  5. Corporate Tax and Companies in Dubai: evolving regulations

 

Updates and clarifications on the new Corporate Tax in the UAE

As already discussed in previous articles, the government of the United Arab Emirates announced the implementation of the Corporate Tax starting from June 1, 2023.Therefore, the purpose of this article is not to explain what the Corporate Tax entails and which entities will be required to pay, as these topics have already been extensively covered.

However, since this is a completely new law for the United Arab Emirates, several clarifications have been issued following its enactment, particularly regarding companies in free zones.

These clarifications have shed more light on the exemptions for free zone companies.

It should be noted that even if a company in a free zone can benefit from exemptions or a 0% tax rate, it will still be required to maintain proper accounting practices, similar to those of regular limited liability companies all over the world, and have all its financial statements certified by an authorized auditor at the end of the year.

 

The new Corporate Tax and companies in free zones

Therefore, even a company in a free zone, under certain requirements, may be required to pay Corporate Tax.

To better understand what the regulations state regarding free zone companies, we need to refer to the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, which introduced the Corporate Tax in the UAE.

Specifically, Chapter 5 – Free Zone Person, in Article 18 and following the aforementioned Federal Decree-Law, provides the answers we are seeking to fully comprehend the new taxation in relation to companies in free zones.

Article 18 specifies the characteristics that a “Qualifying Free Zone Person,” i.e., a free zone company eligible for exemptions or a 0% tax rate on the Corporate Tax, must possess.

First and foremost, the fundamental requirement to be exempt from Corporate Tax (CT) for a free zone company is to have income derived exclusively from entities located:

  • outside the United Arab Emirates,
  • within the same free zone, or
  • in another free zone.

If a company within a free zone generates non-passive income from sales made to entities within the United Arab Emirates, its entire income will become subject to the CT regime.

In summary, if a free zone company sells and markets products and services to individuals residing in the UAE or to companies established in the mainland of the UAE, it will lose the exemption benefit from the CT and will be required to pay the 9% tax, even on profits generated under exemption conditions. Therefore, a single transaction with the UAE territory is sufficient to subject the company’s entire profit to Corporate Tax.

Provided that there are no transactions with the United Arab Emirates, the income of a company located in a free zone is therefore tax-exempt.

The aforementioned condition will mainly affect multinational enterprises (MNEs) operating in free zones but engaging in regular exchanges with the mainland.

Even from a fiscal perspective, the subject under examination demonstrates that corporate legislation in the UAE is becoming increasingly structured.

If you are considering opening a company in Dubai, you should rely on professionals who specialize solely in this field, specifically in Dubai, to avoid unpleasant surprises, fines, and complaints from Emirati authorities.

Although it may sound obvious, it is always important to reiterate this concept because, unfortunately, 90% of those who “assist” individuals in opening a company in Dubai are jacks of all trades without any qualifications or expertise. In many cases, besides setting up companies, they engage in various other activities such as real estate, acting as influencers on YouTube or Instagram, organizing excursions or tourist trips, and much more, clearly lacking specialization in anything.

It is evident that these self-proclaimed experts cannot handle activities such as establishing and subsequently managing a company in Dubai since they are completely unfamiliar with the new regulations and have only one objective: to sell you a company that, in the best-case scenario, will become unusable, and in the worst-case scenario, may even cause you significant legal problems.

 

Free Zone Companies and Corporate Tax: Key Details in Brief

As mentioned earlier, the cases in which a free zone company will not be required to pay the Corporate Tax are as follows:

Transactions with companies located outside the United Arab Emirates.

Trade with companies located in the same or another free zone.

Passive income generated by the free zone company that does not have branches in the mainland (royalties, interests, dividends, and capital gains derived from the ownership of shares of companies in the United Arab Emirates).

Therefore, as seen, free zone companies will need structured accounting in order to accurately allocate expenses and maintain complete transparency regarding goods and services sold.

There are conditions that free zone companies must meet to be exempt from paying Corporate Tax.

In fact, companies in free zones will also need to meet the requirements of the Economic Substance Regulation (ESR) and establish specific accounting and auditing processes accordingly.

Maintaining this “adequate substance” on Emirati territory will require verification of various factors, such as the presence of labor and employees, income-generating assets and activities, and premises or offices potentially taken on lease within the UAE.

Furthermore, the company must be directed and managed in the United Arab Emirates.

 

Startups, Small and Micro Enterprises in Dubai: The New Tax Benefits

The Ministry of Finance (MoF) has recently issued Ministerial Decision No. 73 of 2023 on the relief for small businesses under Federal Decree-Law No. 47 of 2022 on the taxation of corporations and businesses (Corporate Tax Law).

This decision aims to provide tax benefits and incentives to startups, and small, and micro enterprises in Dubai. It is part of the government’s efforts to promote entrepreneurship and support the growth of small businesses in the emirate.

Under this ministerial decision, eligible startups, and small, and micro-enterprises will receive certain exemptions and relief from corporate tax obligations. These measures aim to reduce the financial burden on these businesses and facilitate their development and expansion.

The specific details and criteria for qualifying for these tax benefits are outlined in Ministerial Decision No. 73 of 2023. It includes provisions related to the size of the business, annual turnover, and other relevant factors.

It is important for startups and small businesses in Dubai to be aware of these new tax advantages and ensure compliance with the necessary requirements to benefit from them. Seeking professional advice and assistance from qualified tax consultants is recommended to navigate the complexities of the Corporate Tax Law and maximize the available benefits.

The introduction of these tax incentives demonstrates the government’s commitment to fostering a favorable business environment and encouraging entrepreneurship in Dubai. It is expected to attract more startups and small enterprises, stimulate economic growth, and contribute to the overall development of the emirate’s business landscape.

The ministerial decision regarding relief for small businesses specifies the income threshold and the conditions under which a passive subject can choose relief for small businesses. It clarifies the provisions for carried-forward tax losses and the non-deductible net interest expense within the small business relief regime.

The ministerial decision on aid for small businesses establishes the following:

Passive subjects, provided they are residents of the UAE, can apply for relief for small businesses if their income during the fiscal period and preceding periods is less than 3 million AED for each fiscal period. This means that once a passive subject exceeds the income threshold of 3 million AED in any fiscal period, the Small Business Relief will no longer be available.

The income threshold of 3 million AED will apply to fiscal periods beginning on or after June 1, 2023, and will continue to apply only to subsequent fiscal periods ending on or before December 31, 2026.

Income can be determined based on applicable accounting principles accepted in the United Arab Emirates.

Small Business Relief will not be available for companies in free zones.

 

Regarding the artificial separation of businesses, the ministerial decision specifies that if the federal tax authority (FTA) determines that passive subjects have artificially separated their business or commercial activity as a whole, and the total income of the various businesses or commercial activity exceeds 3 million AED in any fiscal period, and such individuals have chosen to apply for Small Business Relief, this will be considered an agreement to obtain a tax advantage on companies under clause (1) of Article 50 relating to the general anti-abuse provisions of the corporate tax law.

 

Corporate Tax and Companies in Dubai: Evolving Regulations

As you may have understood from this and previous articles, the regulations on corporate tax are still subject to various interpretations and will require further clarification from the Emirati authorities.

The Emirati government, as always, is working to provide the best possible support to businesses.

To achieve this, it is crucial to fully understand the regulations, including the latest updates, in order to establish a company in Dubai in the best possible way, without risks and while maximizing advantages.

 

If you wish to stay informed about developments and fiscal news in the United Arab Emirates, you can contact us and schedule an appointment with the most suitable professional for your specific case, using the following Schedule.

 

 

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