A Free Zone company or a Qualifying Free Zone Person can be benefitted from a special Corporate Tax rate of 0% on their "Qualifying Income" exclusively. The qualifying income is based on the transactions made by the entities. A Free zone entity with transactions outside the UAE will pay a 0% corporate tax. However, based on other transactions, it can be subject to a 9% tax rate.
Since the Corporate Tax proposal in the UAE, the level of anxiety has grown among business owners about the implementation of Free Zones. Corporate Tax consultants in Dubai assume that there is a reason for concern as the tax motives were the unique feature of free zones.
The Federal Tax Authority (FTA) released the corporate tax law on December 5, which contains various provinces for Free Zone and the taxable income for free zone persons. According to the public consultation document on Corporate Tax, ‘Free Zone Persons’ would be within the tax prospects yet could receive tax relaxation under specific conditions.
This session covers the Corporate Tax on Free Zones in the UAE.
How is Corporate Tax Applied to Free Zones in UAE?
The Corporate Tax policy in the UAE relates the Free zone registered companies and branches as Free Zone Persons. These Free Zone Persons are included in the Corporate tax prospects in the country. This depicts that they need to file corporate tax returns and also meet certain administrative requirements. However, the Corporate tax scheme would meet the corporate tax motives alleged on Free Zone Persons, ensuring the maintenance of sufficient elements and adhering to all regulatory requirements.
What is the Corporate Tax Applied for Free Zone Person?
A Free Zone Person utilizes 0% corporate tax on the income from their transactions with businesses located outside the UAE, or from trading with various businesses located in the same or other Free Zones. The 0% corporate tax is applied to income from legalized financial services aimed at foreign markets. Tax consultants in Dubai help the free zone companies to determine corporate tax rates.
10 types of Free Zone Entity Transactions applicable for Corporate Tax
- Transactions between a Free Zone company and a business outside the UAE will be taxed at 0%. This implies that a Free Zone firm pays no tax on profits obtained outside the UAE.
- Profits made inside the same Free Zone will be taxed at 0% only.
- Similarly, profits gained from trade with firms in another UAE Free Zone will be taxed at 0%.
- If the Free Zone Person has a branch on the mainland, a 9% tax will be levied on the revenue received at the branch from mainland sources. At the same time, for such mainland branches, just 0% will be applied to any revenue other than mainland-derived income.
- Even if the Free Zone person does not have a branch on the mainland, the passive income derived from the mainland is 0%. Interest, royalties, and dividends, as well as capital gains from holding shares in mainland UAE enterprises, are examples of passive income.
- Many businesses registered in the Free Zone have mainland subsidiaries. Income from dealings with group firms based on the UAE mainland will be taxed at 0%. Payments provided to the Free Zone Person by a mainland group firm, on the other hand, are not deductible on the mainland. It implies that it will be taxed at 9% on the mainland.
- If a Free Zone person residing in a specified zone sells products to a UAE mainland firm, and the UAE mainland business is the record importer of those goods, the Free Zone Person will be taxed at 0% Corporate tax.
- Income from some regulated financial services aimed at international markets will be taxed at zero percent.
- Any other sort of mainland source income produced by a Free Zone Person that is not described in points one through eight will be taxed at 9%.
- Last but not least, if the Free Zone Person has a PE, or Permanent Establishment, on the mainland UAE, the Free Zone Person would forfeit the Tax Incentive and would otherwise be eligible for 0% taxes.
The Free Zone companies will need robust accounting records for allocating expenses and determining net income from each of the above transaction streams.
Impact of Corporate Tax on Various Zones
The UAE has categorized certain Free Zones as Designated Zones for VAT purposes. A Free Zone Person registered in a Designated Zone would utilize 0% corporate tax on income from the goods sold to the UAE mainland businesses. Companies established in these Designated Zones can use the corporate tax services to evaluate the tax rate on their transactions.
According to the Corporate Tax policy, any business has to submit the required documents for Corporate Tax Registration. However, Free Zone Person needs to have audited financial statements to enjoy the benefits of the 0% corporate tax rate.
Corporate Tax Consultants Who Assist Free Zone Businesses
Approaching Corporate Tax Consultants in Dubai helps the free zone companies to evaluate the possible impact of corporate tax on profits and income. BMS Auditing is one of the leading corporate tax advisors who assist you in proper planning and preparation for corporate tax. Some of the attractions among the services from BMS Auditing are the Corporate Tax Evaluation & Advisory, Compliance, and Agent services representing FTA in case of any notices from the tax authority.