UAE Corporate Tax & Free Zone Companies

03 Feb, 2023 / Haroon Juma / Corporate Tax

UAE Corporate Tax

What Is Eligibility To Retain 0% Corporate Tax Rate & How Could Transfer Pricing Help?

Free Zones have played a key role in driving UAE economic development and foreign direct investment. Free Zones have been a popular incorporation strategy for many businesses attracted by exemptions from corporate and income tax.

In order to retain the attractiveness of Free Zones, the recent UAE Corporate Tax Law (CT Law) tries to strike a balance between Free Zone regulators to honour their corporate tax exemption status and ensuring that the companies are not artificially created purely for tax avoidance purposes

Therefore, the Corporate Tax Law defined a category of a so-called “Qualifying Free Zone Person”, a company registered in a Free Zone, which will be able to retain the tax exemption (0% corporate tax rate) for the remainder of the period stipulated in the applicable legislation of the Free Zone. In addition, under the Corporate Tax Law, this period can be extended by the decision of the Cabinet but no longer than 50 years.

What Conditions Must Be Satisfied To Retain 0% CT Rate?

To be considered a Qualifying Free Zone Person, the Free Zone company must:

  • Maintain adequate substance in the UAE (in line with the UAE economic substance requirements);
  • Derive “Qualifying Income”;
  • Not elected to be subject to Corporate Tax at the standard rates; and
  • Comply with the transfer pricing (“TP”) requirements under the Corporate Tax Law.

These are the stated Free Zone prevailing conditions under the UAE Corporate Tax Legislation, they are subject to additional conditions that a Qualifying Free Zone Person under a Ministerial Decision.

If a Qualifying Free Zone Person fails to meet any of the conditions or makes an election to be subject to the regular Corporate Tax regime, it will be subject to the 9% corporate tax rate.

Is Transfer Pricing Relevant?

Yes. Your Free Zone company should apply the arm’s length principle for transactions with related parties (meaning that the transactions with its related parties are being carried out at market conditions) and it is obliged to fulfill the Transfer Pricing documentation requirements, i.e.

  1. Filing a Disclosure Form
  2. Preparing a Transfer Pricing Master File
  3. Preparing Transfer Pricing Local File,

As discussed in our previous article, this is one of the conditions to be considered as a Qualified Free Zone Person.

The Corporate Tax Law is currently silent on the impact of income derived from the UAE mainland but suggests that a Qualifying Free Zone Person should only derive “Qualifying Income” which will be further specified in a Cabinet Decision, to apply the 0% Corporate Tax rate.

Although Corporate Tax Law does not define Qualifying Income, the Public Consultation Document (PCD) published by the Ministry of Finance on 28 April 2022, provides more detailed information on the proposed UAE Corporate Tax regime. Namely, certain categories of income such as income from foreign countries, income from other Free Zones, and potentially passive income from the UAE mainland, such as interest and royalties were discussed as potential qualifying income.

Article 3.31 of the PCD elaborates on the deductibility of payments from related party mainland entities, however, it is not a requirement as per the Corporate Tax Law. Potentially, this can mean that the payments of mainland-related entities will fall under the Qualifying Income, or, that as long as these payments are in line with the arm’s length principle, Corporate Tax Law is not placing additional deductibility restraints.

There are further clarifications expected under Cabinet Decision(s). These are expected to clarify a number of material issues such as defining what would be considered as “Qualifying income”, confirming whether the Free Zone companies that are not engaged in related party transactions absolve of the Transfer Pricing compliance requirements, and the threshold for transfer pricing obligations to be met.

If your business is assessing the impacts and strategy to manage your Corporate Tax obligations and effectiveness, our consultants can assist you in planning and implementing your Corporate Tax and transfer pricing model.

About SimplySolved

SimplySolved is an FTA Accredited Tax Agency with ISO 9001 Quality & 27001 Information Management Certification; we offer a quality-based approach to our services supported by a dedicated team of certified professionals.

Our offerings are specially designed to meet the UAE Regulations to put you in control, comply with the regulations and help you make better business decisions. With experience and local knowledge, we partner with our clients to find solutions and manage their risks about their challenges and objectives.

While this article provides high-level guidance, it is not a substitute for tax or legal advice, and we encourage you to seek advice regarding the specific matters that concern you. You may contact us for a no-obligation consultation if you wish to speak to us.

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