The Ministry of Finance has released a Consultation Document for the public regarding Corporate Taxation. The proposed corporate tax law is much simplified and easy to understand for all business owners. A nine percent corporate tax is going to apply to businesses having net revenue above 3.75 million dirhams. When it comes to free zone companies they have certain exemptions if they follow certain conditions. Different factors like domestic situations on supplies, overseas taxation, and transfer pricing may surpass the corporate tax rate above 9%. Free zone companies should be aware of this fact. We will briefly discuss the impacts of corporate tax in UAE on companies located in the Free zone.
What would be the possible impact of corporate tax in UAE on activities of the Free Zone?
There are many Free Zones in the UAE. These Free Zones play a crucial role in the betterment of UAE's economy by encouraging foreign investors and easing the process of doing business over here. Keeping this fact in mind the Ministry of Finance offers "tax incentives" to companies operating in the Free zone. But, they have to retain sufficient substance, and compliance with all regulatory requirements is vital.
A 0% Corporate Tax rate on industry revenues produced in the following circumstances would be advantageous for Free Zone enterprises and would be by the original objective and motive of Free Zone jurisdictions;
- From dealings with companies based outside of the United Arabs Emirates and companies that are housed inside the same Free Zone.
- From dealings with establishments situated in some other Free zone.
- From the sale of commodities to United Arab Emirates mainland enterprises that are the authorized importers of those goods by Free Zone firms operating in Designated Zones.
- From transactions between Free Zone businesses and the mainland UAE-based members of their faction. However, for UAE corporate tax purposes, the accompanying payments paid by mainland firms will not be deductible.
- From "passive" revenue obtained from businesses founded in the landmass UAE. Included in this are interest, royalties, profits, and equity gains emanated from the ownership of shares in mainland UAE-based businesses. It is also clearly mentioned in the corporate tax regime that certain business profits will be charged for corporate tax rate i.e., 9%. Let's see what are possible cases in that situation.
- They have to see whether there is a transaction between Free zone firms and UAE mainland firms or not.
- Secondly, they have to check if the firm operating in the free zone has a tributary in the mainland receiving its sourced revenue while prevailing advantage from 0% corporate tax rate on its other dividend.
A Free Zone firm has the option to decide at any time whether to be liable to UAE regular corporate tax. If the Free Zone firm is given normal corporate tax status, it cannot be revoked.
Requirements for Corporate Tax in UAE Compliance
Free zone companies can't be devoid of the scope of the corporate tax regime despite having a 0% corporate tax rate. They have to file for annual tax returns, register for corporate tax, retain sufficient substance, and comply with all regulatory laws. Free Zone businesses that receive the 0% Corporate tax rate are not permitted to decide to create a tax group and receive the corporate tax regime's single taxable person treatment.
Measures that should be taken by Free zone companies
As we already discussed, corporate tax has different impacts on different kinds of transactions. Thus, all free zone enterprises should keep the following points in mind;
- Analyze the corporate tax requirements that apply to your current company activity. Recognize what should be zero-rated in the UAE or taxable at the usual UAE corporate tax rate.
- Analyze the business plan, legal framework, and capital layout analysis.
- Look into proper bookkeeping. Each legal commodity is required to document taxable income individually unless incorporated in the Tax Group for Corporate Tax purposes.
- Verify that the company keeps accounting records by recognized global accounting criteria.
- Infer whether the documentation kept up to date by the company is sufficient to support business profits eligible for 0% CT relief or taxable at the ordinary UAE Corporate rate; correct as appropriate. Tax officials could examine the supporting documentation and the catalogues of accounts.
To get precise corporate tax advisory services, look out for a professional corporate tax advisor. They make sure that you are fulfilling all legal requirements regarding corporate income tax UAE. Also, you can protect your business from any serious penalty or fine by ensuring compliance with corporate tax law.
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Hire our expert business tax advisory services today to get a better understanding of the upcoming corporate tax regulation and get all of your queries answered. We will help you prepare in advance for the new tax regime that will be implemented in 2023. Our aim is to make taxation procedures easier for your business.
Abrar Ahmad holds a Master’s as well as an MPhil in Finance and has an extensive experience of 10+ years in managing all aspects of Taxation, VAT Consulting and Accounting. He also carries with him a working knowledge of corporate tax and has helped drive value and growth to the businesses of numerous clients.