On April 28, 2022, the Ministry of Finance made the proposed UAE business tax document available for public comment. Companies or businesses registered in free zones are referred to as “Free Zone Persons” (FZP) from now on. These Free Zone Persons will be subject to the new UAE corporate tax and must submit their tax returns on an annual basis.
Let’s see the application of corporate tax in the UAE to various kinds of transactions in a free zone entity-
Transactions made by a Free Zone company to a company based outside the United Arab Emirates will be taxed at 0%. It means that a free zone company’s profit made from sources elsewhere than the UAE will not be subject to tax.
Additionally, the profit generated by trading inside the same Free Zone will be subject to a 0% tax rate. Similar to this, profits from businesses operating in another UAE Free Zone will also be taxed at 0%.
If a Free Zone Participant has a branch on the mainland, a 9 per cent tax will be applied to any income made at the branch from sources on the mainland. Additionally, for such a mainland branch, just 0% of all income other than money received from the mainland will be accountable.
The free Zone resident will still be entitled to 0% tax on any passive income derived from the mainland even if they don’t have a branch there. Interest, dividends, royalties, and capital gains from owning shares in mainland UAE enterprises are all included in the passive income in this case.
The free Zone resident will still be entitled to 0% tax on any passive income derived from the mainland even if they don’t have a branch there. Interest, dividends, royalties, and capital gains from owning shares in mainland UAE enterprises are all included in the passive income in this case.
Many businesses with headquarters in the Free Zone also have parent companies on the mainland. Income from dealings with the group companies based on the mainland of the UAE will be taxed at 0%. However, payments made by a mainland group company to a Free Zone [individual will not be deductible expenses on the mainland. It implies that it will be indirectly taxed at 9% on the mainland.
Many businesses with headquarters in the Free Zone also have parent companies on the mainland. Income from dealings with the group companies based on the mainland of the UAE will be taxed at 0%. However, payments made by a mainland group company to a Free Zone [individual will not be deductible expenses on the mainland. It implies that it will be indirectly taxed at 9% on the mainland.
If a Free Zone person operating in a designated Zone sells products to an entity operating on the UAE mainland and that entity is listed as the importer of those items in the records, the free zone person will be subject to a corporation tax rate of 0%.
A Free Zone Person who earns any other form of mainland source income than what is explained in points one through eight will be subject to a 9 per cent tax.
Income from some regulated financial services targeted at international markets will be subject to an 8% tax.
The free zone person will lose the tax incentive and will no longer be eligible for zero percent taxation if they have PE, or permanent establishment, in the mainland UAE.
Final Words
ebs is dedicated to providing and openly outlining the effects that the introduction of corporation tax will have on your company. We hope that by keeping you aware of the major regional changes, you will be better able to make business decisions.
We have a team of highly professional accounting and financial professionals who will help you fulfill all the requirements related to the UAE corporate tax in free Zones.
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