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UAE corporate tax is expected to be implemented for the fiscal year beginning on or after June 1, 2023. The UAE residents would be subject to tax on their global profits under the proposed UAE corporation tax. Entrepreneurs have been concerned about the corporate tax's applicability to free zone enterprises ever since the government of the UAE proposed it. The corporate tax consultants in the UAE believe their concern is valid since tax incentives are one of the unique selling points of free zones. According to the UAE corporate tax public consultation document, free zone persons will be liable for the tax, but under certain circumstances, they may be eligible for tax reduction.
However, you must consider that the UAE corporate tax law has not yet been released, therefore any decisions you make must be based on the final version of the law. For tax planning, it will be better to get advice from corporate tax advisers in the UAE. Now, let’s dive deeper into the significant things companies must know about free zone corporate tax.
Companies and branches registered in a free zone are referred to as "free zone persons" under the UAE corporate tax framework. Corporate tax will apply to persons operating within UAE free zones. It implies that they must comply with other administrative requirements and file company tax returns in the UAE. However, as long as they maintain sufficient substance and adhere to all applicable regulations, the UAE corporate tax framework will continue to honor the tax incentives now afforded to free zone persons.
A free zone person may benefit from the 0% corporation tax rate on income earned from trades with companies outside the UAE or from commercial dealings with companies in the same free zone or any other free zone. Revenue from a few regulated financial services targeted at international markets will also be subject to the 0% corporate tax rate. Free zone businesses should examine their company tax rates with the aid of corporate tax specialists in the UAE.
A corporate tax of 0% may apply to the income earned through transactions with companies outside the UAE, trading with companies based in that free zone or any other free zone, "Passive income" of the free zone firm, which has no mainland branches, as well as income from transactions with group companies based on the mainland UAE. Such payments or expenses made by mainland group firms to free zone companies, however, will not be accepted as deductible expenses. A free zone company's other revenue streams will be almost certainly all susceptible to corporate tax.
Some businesses with free zone registration may have a branch on the UAE's mainland. The income of such enterprises originating from the mainland will be subject to the ordinary corporate tax rate of 9%. On the other income, however, you can continue to benefit from the 0% corporate tax rate. Seeking the help of financial consultants in the UAE will help you know the tax rate for your mainland branch.
A free zone person without a mainland branch is likely to frequently transact with the UAE mainland. As long as the income derived from the mainland is restricted to passive income, such transactions can still benefit from the 0% corporate tax rate. Interest, royalties, dividends, and capital gains from owning shares in mainland UAE companies will all be included in the passive income.
For the Value Added Tax (VAT), the UAE has designated some free zones as designated zones. A free zone person registered in a designated zone will be able to avail of the 0% corporate tax on income derived from the sale of products to firms on the UAE mainland that are the importers of record for those commodities. To calculate the tax rate on their transactions, businesses incorporated in designated zones may use corporate tax services in the UAE.
Being one of the Top Accounting and Auditing Firms in the UAE, Reyson Badger can help you prepare corporate tax. With a team of financial experts, we can help free zone businesses evaluate corporate tax's potential effects on their revenues and earnings. Free zone business or not, having your accounts audited accurately is necessary for the smooth running of your business. We, at Reyson Badger, provide a plethora of accounting services. From accounting, bookkeeping, and forensic audit to corporate tax assessment, our expert team provides top-notch services to our clients. If you are a free zone person on the lookout for a professional tax accounting firm in the UAE, Reyson Badger is the right choice!