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Wed, Oct 16, 2024 | Rabi al-Thani 13, 1446 | DXB
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Impact of corporate tax on manufacturing companies
Manufacturing free zone companies should maintain separate books of accounts for manufacturing and distribution business
- By
- Prateek Tosniwal
Generally, manufacturing of goods or materials in a free zone is a qualifying activity, subject to zero per cent corporate tax, and nine per cent corporate tax in the mainland.
As per UAE Ministry of Finance Corporate Tax Consultation Paper, manufacturers can broadly be categorised into two types: one that manufactures products or materials for and on behalf of another person (contract or toll manufacturing) and; the other that manufactures its own products or materials.
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Corporate tax implications in case of contract manufacturing/toll manufacturing: The income derived by manufacturing companies in the free zone from the manufacturing services provided to the contractors, irrespective of whether the contractor is based in a free zone, in the mainland UAE or in a foreign country, will be considered as qualifying income and thus, subject to zero per cent corporate tax.
Although contract manufacturing and toll manufacturing are similar modes of production, in the case of toll manufacturing, the contractor would typically supply manufacturing companies with the necessary raw materials, designs and production specifications. Therefore, income earned by a toll manufacturer based in a free zone will also be considered as qualifying Income and thus, subject to zero per cent corporate tax.
Prateek Tosniwal, Partner, MI Capital Services
Corporate tax implications in case of full fledged manufacturing companies: In the case of ‘fully fledged’ manufacturing, the free zone person manufactures products in its own name and at its own risk. The manufacturing company would normally be responsible for procuring the necessary raw materials and may sell the manufactured products or materials to a related party or third-party distributors, retailers or end-customers. The income derived by the manufacturing company in the free zone from the manufacturing of goods or materials will be considered as qualifying income, irrespective of whether the manufactured products or materials are manufactured for the sale to the mainland or foreign juridical persons and thus, subject to zero per cent corporate tax.
However, the income (i.e. sales profit) that is attributable to the distribution (i.e. sale) of the manufactured products or materials will not be considered as qualifying income from manufacturing and therefore, be subject to nine per cent corporate tax, unless the distribution of goods or material is in or from a designated free zone, which will then make the distribution income as qualifying income, and be subject to zero per cent corporate tax.
Therefore, it is important for manufacturing free zone companies to maintain separate books of accounts for manufacturing and distribution business.
The writer is Partner, MI Capital Services
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