Are UAE free zone companies exempt from corporate tax?

File photo. — Wam

The FZ companies will need robust accounting records for allocating expenses and determine net income from each of the above transaction streams.

By Pankaj Jain

Published: Sat 30 Apr 2022, 3:45 PM

Last updated: Sat 30 Apr 2022, 10:59 PM

On Thursday, the UAE Ministry of Finance (MoF) released a Public Consultation Document on UAE Corporate Tax. Here are some key questions answered by our expert.

Are free zone companies eligible for 0 per cent corporate tax?

Income earned from the following transactions is likely to benefit from 0 per cent CT:

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*Transactions with businesses located outside UAE.

*Trading with businesses located in the same or any other free zone.

*Certain regulated financial services directed at foreign market sale of goods (from VAT Designated Zones) to customers in mainland if the customers are the importer-on-record.

Additionally, the following incomes should also be eligible for 0 per cent CT:

‘Passive income’ of the FZ company which does not have any branch in mainland. ‘Passive income’ will include interest and royalties, dividends and capital gains from owning shares in mainland UAE companies. Income from transactions with group companies located in mainland UAE. However, such payments/expense by mainland group companies to FZ company will not be allowed as a deductible expense.

All other income streams of a FZ company is likely to be subject to CT.

The FZ companies will need robust accounting records for allocating expenses and determine net income from each of the above transaction streams.

Will free zone companies be required to meet any conditions to be eligible for 0 per cent Corporate Tax?

The Free Zone companies will be required to maintain adequate substance and comply with all regulatory requirements.

Maintaining adequate substance could require meeting the tests of Economic Substance Regulations (ESR) i.e. the presence of adequate manpower, assets and income-generating activities in the UAE. Further, the entity must be directed and managed in the UAE.

Will the services supplied by Free Zone companies be subject to CT?

Income from transactions with businesses located outside UAE will benefit from 0 per cent CT.

Income from services supplied to the customers in the mainland UAE or in Free Zones is likely to be covered under 9 per cent CT.

I own a company in mainland UAE. Will the export of goods and/or services from mainland to overseas customers be subject to CT?

The policy document does not provide details about the tax treatment of the export of goods or services from mainland UAE.

Considering the scheme of CT, income from the export of goods/services from mainland UAE is likely to be covered under 9 per cent CT.

Can I or my family members draw salary from the company that I own? Alternatively, can I or my family member charge rent for the premises owned by me but leased to the company?

The policy document recognises that the absence of a personal income taxation in the UAE can generate incentives for individual owners of taxable businesses to erode CT base by making excessive payments to themselves or persons connected with them.

Accordingly, payments or benefits provided by a business to its “Connected Persons” (defined below) will be deductible as expense only if the business can demonstrate that the payment or benefit:

corresponds with the market value of the service provided; and is incurred wholly and exclusively for the purposes of the taxpayer’s business

The business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons. All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle. The salaries/rent will be tax free in the hands of the recipients.

Who are “Connected Persons”?

A person will be considered as ‘connected’ to a business if he/she is:

An individual who directly or indirectly has an ownership interest in, or controls, the taxable person.

A director or officer of the taxable person.

An individual related to the owner, director or officer of the taxable person to the fourth degree of kinship or affiliation, including by birth, marriage, adoption or guardianship.

Where the taxable person is a partner in an unincorporated partnership, any other partner in the same partnership.

A “Related Party” as defined in the law.

The writer is the managing director of AskPankaj Tax Consultants. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.