On January 31st, 2022, the UAE Ministry of Finance (MoF) announced the introduction of Corporate Tax (“CT”) in the United Arab Emirates which will be effective for financial years starting on or after June 1st, 2023. On 28 April 2022, MoF also released a Public Consultation Document highlighting key features of the much-awaited UAE CT regime.
Since the announcement of Corporate Tax, there have been a lot of speculations among UAE Freezone businesses (commonly referred to as “Freezone Persons” in the consultation document) regarding their Taxable position under the UAE CT regime.
As evident, Freezones have been an integral part of the UAE economy as it encourages foreign direct investment and facilitates ease of doing business in the UAE. It offers the convenience of 100% foreign ownership, 100% repatriation of capital and profits, Tax holidays ranging up to 50 years, Import & Export exemptions, preferential customs duty rates, world-class infrastructure, etc. Being present in UAE Freezone provides businesses with the opportunity to expand at a global level. With the introduction of the UAE CT regime, Freezones also come under the scope of “CT”. There have been numerous concerns and questions regarding the same.
The Public consultation document confirms that while Freezone Persons might be subject to a 0% CT rate, they will still be under the scope of Corporate Tax and shall be subject to tax return filing requirements. However, the UAE CT regime will honour the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements.
In a nutshell, Freezone persons benefit from a 0% CT rate on transactions with businesses outside UAE and on transactions with other free zone businesses. There have been details provided on “CT” applicability in the event Freezone Persons have a mainland branch or Freezone group of companies.
The Freezone Persons will be disqualified from the 0% CT tax rate if it transacts with mainland UAE companies.
Thus, the impact of “CT” on Freezone Persons may vary depending on their specific transactions and operational structure. To safeguard their 0% taxable position, Freezone persons need to analyse their legal structure and business models ensuring no transactions/no sourced income incurred from mainland companies. Another area of concern is documentation that mandates freezone persons to have audited financial statements which include adequate bookkeeping and maintaining accounting records as per internationally accepted principles.
The introduction of Permanent establishment (“PE”) rules and principles with respect to determining whether a Freezone has a PE in mainland UAE is an important subject matter for Freezone Persons.
However, if Freezone Persons make an irrevocable election to be subject to the 9% CT rate, it will be outside the Freezone compliance obligation.
In the current scenario, the impact of the UAE CT regime on the Freezone Persons that carry out “Relevant Activities” to maintain and demonstrate adequate economic substance in the UAE is unclear and the consultation document remains silent on whether Freezone Persons will be required to comply with annual notification and reporting obligations.
The rationale behind implementing ESR was to prevent multinational organisations from artificially shifting profits from high tax jurisdiction to low/no tax jurisdiction and align with global international tax standards. With a statutory CT rate of 9%, it is expected that UAE businesses may no longer be required to comply with Economic Substance Requirements. However, there is a possibility that ESR may still be applicable to Freezone Persons that continue to benefit from 0% CT rate.
Send in your questions or book a consultation session with our Tax Experts to get all your Tax related query answered.
On the occasion of Eid, we will be out of the office but just a call away from you. Please find the contact details below to get in touch with us: