What will be the Impact of the Proposed UAE Corporate Tax on Free Zone and Mainland Firms?

Tax Agent December 12, 2022

The United Arab Emirates has globally been recognised for its extremely favourable and attractive policies owing to which a lot of high net-worth individuals have migrated to the UAE in the recent past and many foreign investors from across the world have set up holding or intermediate trading companies in the Gulf nation to enjoy one of the most preferential tax regimes in the world. Furthermore, the ease of doing business, availability of several free zones and multiple bilateral double taxation agreement with other countries globally were other drawing factors for companies to migrate to the UAE.

However, the tax-free statute of the UAE is soon going to change. In 2021, the Organisation for Economic Cooperation and Development (OECD) rolled out its Two-Pillar approach which was signed up by 141 countries including the UAE. The Inclusive Framework required the levy of a minimum 15% corporate tax on the profits of multinationals.

Therefore to comply with the OECD inclusive framework and to combat international tax avoidance practices, the UAE Finance Ministry has announced the introduction of Federal Corporate Income Tax for companies in the UAE which becomes effective from 1st June 2023. Since the announcement has come in, corporate tax has become the talk of the town and everyone is trying to figure out the impact of corporate tax on UAE businesses.

In this article, we have assessed and analysed the impact of corporate tax on the Free Zone and Mainland Firms.

New Corporate Tax Regime in the UAE

The newly imposed corporate tax will be levied on the profits derived by businesses from commercial activities in the UAE. The only exceptional activity which is subject to a separate corporate tax at the individual Emirate level is the extraction of natural resources.

For other UAE businesses, a corporate tax rate of 9% will be imposed on profits above AED 375,000. This also means, for small businesses with taxable profits not exceeding AED 375,000, the corporate tax rate would be 0%.

For multinational corporations with a consolidated global revenue exceeding EUR 750 million (approximately AED 3.15 billion), a different corporate tax rate would be applicable which is still to be announced.

Impact of UAE Corporate Tax on Free Zone Businesses

Since Free Zones are an integral part of the UAE economy that boosts foreign direct investment and facilitates ease of doing business in the country, they would continue to receive the current tax incentives being granted to them, provided they maintain adequate substance and comply with all regulatory requirements.

Moreover, the Ministry of Finance has indicated that businesses registered in Free Zones will be subject to a 0% corporate tax rate. However, they would still remain within the scope of the UAE corporate tax; which means, free zone companies would be required to register themselves for corporate tax, file annual tax returns, maintain adequate substance and comply with all other regulatory requirements.

It is noteworthy that Free Zone companies would benefit from a 0% corporate tax rate on business profits earned in the following cases:

From transactions with businesses located outside of the UAE
From transactions with businesses located in the same Free Zone in UAE
From transactions with businesses located in any other Free Zone in UAE
From the sale of goods by a Free Zone company located in the designated zones to UAE mainland businesses that are importers of record of those goods
From transactions between Free Zone companies and their group companies located in mainland UAE. However, payments made by the mainland group will not be deductible expenses for the mainland for corporate tax purposes
From ‘passive income’ received from transactions with mainland UAE companies. This includes interest and royalties, dividends and capital gains from owning shares in mainland UAE companies

All other income streams of a free zone company are likely to be subject to UAE corporate tax.

A Free Zone company would still be taxed at the regular corporate tax rate on business profits in certain cases as mentioned below:

When a Free Zone company transacts with a mainland UAE company
When a Free Zone company that has a branch in mainland UAE receives mainland sourced income while continuing to benefit from the 0% corporate tax rate on its other income.

Impact of UAE Corporate Tax on Mainland Businesses

The impact of corporate tax on mainland companies will be as follows.

Audit of Financial Statements

Based on relevant laws and regulations, mainland companies will have to determine whether their financial statements need to be audited. In fact, even Free Zone companies will need to get their financial statements audited to benefit from the 0% corporate tax rate.

Review of Systems and Processes

Companies will need to review their existing processes and systems to assess their readiness for the new corporate tax regime. This will include a thorough review of their revenue and expense transactions, inter-company transactions, capital assets and inventory management, etc.

Businesses will also need to optimise their processes to align with the UAE corporate tax reporting and compliance requirements.

Assess the Impact of Permanent Establishment

Foreign companies conducting business in the UAE will be required to review their existing business models, legal structure, organizational structure, contracting and transfer pricing, long-term agreements, intragroup and cross-border transactions and much more.

How Can Aviaan Accounting Help?

Aviaan Accounting is a Dubai based advisory, accounting and tax firm that offers full-scale tax advisory support and consulting, accounting, legal and compliance services to businesses conducting business both in mainland UAE and the UAE Free Zones.

Our team of senior qualified tax advisors can advise you on the smooth implementation of corporate tax and handhold you at every stage of the corporate tax implementation process.

For enquiries, e-mail: info@aviaanaccounting.com

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