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Mainland or Free Zone — How will Corporate Tax Impact a Company

Businesses are gearing up to file first corporate tax returns next year after mandatory registration

ALL FREE ZONE and mainland companies will have to register for corporate tax and file an annual corporate tax return, except if they are an exempt person, according to the experts.

Tax consultants and analysts said companies will be required to file their corporate tax return within nine months after the end of their tax period. However, one can file their tax return earlier if they wish to.

Mahar Afzal, managing partner at Kress Cooper Management Consultants, said every resident person in the UAE is subject to the corporate tax unless the person is exempt or being a natural person like sole establishment, unincorporated partnership etc generating business income of up to one million dirham during the Gregorian calendar year.

“Every nonresident person is also liable to pay tax on the income generated from UAE if they have permanent establishment in the UAE, earning UAE sourced income or nexus in the UAE,” he said.

However, the resident taxable persons are liable to apply zero per cent corporate tax on the taxable income of up to Dh375,000, and any taxable income beyond Dh375,000 is subject to nine per cent tax: except a qualifying free zone person (QFZP), which are responsible to apply zero per cent corporate tax on the qualifying income and their non qualifying income is subject to tax at nine per cent unless the income is exempt from corporate tax.

From the above requirement, Afzal said it is very clear that corporate tax is applicable to the free zone persons, and the tax rate can be zero per cent or nine per cent based on the nature of the income.

“Since the free zone persons are taxable, so like other resident taxable persons they are liable to comply with the corporate tax law. They are legally responsible for registering for corporate tax, calculating taxable income, submitting the annual return, making the tax payment, and complying with other provisions of the corporate tax law,” he said.

NO THRESHOLD FOR REGISTRATION

For clarification purposes, he said there is no threshold to register the business for corporate tax. “If the business is in losses, having zero income in the last year and expecting no income in the next year, still, they need to apply for corporate tax registration,” he said.

The qualifying free zone persons have certain limitations as given in the law. For example, qualifying free zone persons cannot be part of the qualifying group, tax group, enjoy the restructuring relief, and transfer their losses to another taxable person.

“In nutshell, we can say that non qualifying free zone taxable persons that usually includes mainland companies; and free zone companies other than QFZP, are subject to zero per cent tax up to Dh375,000 and nine per cent tax on any taxable income beyond Dh375,000; and QFZP are subject to zero per cent tax on the qualifying income and their all-other income is subject to tax at nine per cent,” he said.

DIVERSE IMPLICATIONS

Vijay Valecha, Chief Investment Officer, Century Financial, said the introduction of a nine per cent corporate tax in the UAE has diverse implications, particularly based on a company's location and business model.

For mainland companies, a straightforward nine per cent levy on taxable income is imposed, but mitigating factors like government support programmes and subsidies offer some relief. However, adapting to new accounting practices may necessitate investments in software, advisors, or additional personnel.

“In free zones, the situation is nuanced. While some enjoy continued tax exemption due to specific licences or activities, others may sense increased competition as the allure of tax haven diminishes. Even tax-exempted free zone companies face the nine per cent tax on income generated outside the free zone or from transactions with mainland entities,” he said.

Valecha said profit margins and industry nuances amplify the impact. He was of the view that companies with higher profit margins may feel a more pronounced effect, while industries like banking and oil & gas, familiar with higher tax rates, might experience milder adjustments.

“Free zone companies engaging in mainland trade must adhere to transfer pricing regulations to avoid unintended tax liabilities,” he said.

To a question, he said the impact of the corporate tax depends on individual circumstances.

“Free zone companies need strategic assessments to maintain competitiveness, potentially adjusting operations or contemplating relocation for ongoing profitability. Meticulous planning and professional advice are essential for companies to optimize tax positions and adeptly navigate the evolving system,” he said.

RELIEF TO SMALL BUSINESSES

Holger Schlechter, Chief Financial Officer at IFZA, expressed similar views and said both free zone and mainland companies will have to register for Corporate Tax and file an annual Corporate Tax return, except if they are an exempt person.

“Free zone companies can benefit from a zero per cent tax rate on their qualifying income, should they meet the requirements of a QFZP as per Article 18 of the Federal Decree-Law No. (47) of 2022,” he said.

Schlechte said Small Business Relief is also available for both free zone and mainland companies — Companies with a revenue of Dh3 million or less for the tax period and previous tax periods can elect for this relief. Small Business Relief treats the taxable person as not having derived any taxable income in a given tax period.

“Mainland and free zone companies are required to comply with all the requirements of Federal Decree-Law No. (47) of 2022. Non-compliance may lead to penalties, as stipulated in Cabinet Decision No. (75) of 2023. One key requirement that companies need to take note of, is to have proper accounting records, as this will be the base of their annual tax return filing,” he said.

Farhat Ali Khan, Managing Partner, CMI & Co, said all mainland companies or business entities are subject to a nine per cent corporate tax in the UAE. He said the free zone companies carrying out qualifying activities are subject to zero per cent tax and nine per cent tax on the non-qualifying income.

“It is important to understand the business activities of the free zone company to conclude whether its income will be at zero per cent or nine per cent. Nonetheless, all free zone companies must register with the FTA and file returns and accounts,” he said.

TAX RETURNS FILING

Holger Schlechter of IFZA said corporate tax is effective for financial years starting on or after June 1, 2023 – this will be the first ‘tax period’ for which a company will need to file a corporate tax return. “Companies will be required to file their corporate tax return within nine months after the end of their tax period,” he said.

For example – if a company’s financial year is January 1 to December 31, then their first tax period will be January 1, 2024 – December 31, 2024. The tax return for this tax period should then be filed by 30 September 30, 2025.

“Companies will only need to file one corporate tax return for each tax period and will not be required to make advance tax payments or prepare provisional tax returns,” he said.

Echoing the similar views, Afzal of Kress Cooper Management Consultants said the tax return required to be filed within nine months from the end of the relevant tax period.

“The businesses whose tax period will be ending by June 30, 2024, they will be liable to submit their tax return maximum by March 31, 2025, and the entities whose tax period will be ending by December 31, 2024, they will be liable to submit their corporate tax return on or before September 30, 2025,” he said.

Valecha of Century Financial elaborate the filing of corporate tax returns and said in January 2022, the Ministry of Finance announced the introduction of federal corporate tax on businesses' net profits, applicable from either June 1, 2023, or January 1, 2024, depending on the financial year followed by the business.

“In 2024, no businesses will file tax returns as it marks their first year under the corporate tax system. The first batch of registered businesses — with the June 2023-May 2024 tax period — will file their tax returns in February 2025,” he said.

— muzaffarrizvi@khaleejtimes.com

FILING OF CORPORATE TAX RETURNS

JUNE 2023 TO MAY 2024

Businesses with this tax period must register for corporate tax within 26 months starting from January 2023. Their tax return filing deadline for their first year will be February 2025, nine months after the end of their relevant tax period — May 2024. The return filing due date is February 28, 2025, however one can file their tax return earlier if they wish to. The return filing period is from June 1, 2024 to February 28, 2025.

For businesses operating in the UAE during the financial year from June 1, 2023 to May 31, 2024, the following timeline must be adhered to:

January 2023 to February 2025: Registration period (26 months)

June 1, 2023: Application of corporate tax law

June 1, 2023, to May 31, 2024: First tax period

June 1, 2024, to February 28, 2025: Return filing period

February 28, 2025: Return filing due date for the first tax period

JANUARY 2024 TO DECEMBER 2024

Businesses with this second tax period must register for corporate tax within 33 months starting from January 2023. Their tax return filing deadline for their first year will be September 2025, nine months after the end of their relevant tax period — December 2024).

For the subsequent fiscal year, which runs from 1 January 2024 to 31 December 2024, businesses must follow this timeline:

January 2023 to September 2025: Registration period (33 months)

June 1, 2023: Application of corporate tax law

January 1, 2024, to December 31, 2024: First tax period

January 1, 2025, to September 30, 2025: Return filing period

September 30, 2025: Return filing due date for the first tax period