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Dubai, United Arab Emirates: From 1 June 2023, UAE businesses will be subject to a 9% corporate tax on businesses with profits over AED 375,000. Free zone companies are exempt as long as they meet certain conditions. Much, however, lies in the fine print of the conditions themselves.
Free zone companies must be aware that due to domestic supply conditions as well as cross-border taxation, transfer pricing and other OECD guidelines.
Corporate Tax in UAE Free Zones
The UAE’s numerous free zone companies have been the main driver of its international trade. Free zones enjoy various exemptions, including 100% foreign ownership, 100% duty and VAT exemption, 100% capital and profit repatriation, corporate tax exemption, and more.
The new corporate tax enables the UAE government to deliver on its economic reform agenda, as tax exemptions for such free zones can act as a multiplier – provided certain conditions are met.
Free zone entities, as long as they maintain sufficient economic substance, comply with the regulatory requirements of their respective free zones, ensure audited books of account, and most importantly, do not earn income from mainland entities or receive service income from free zones or from free zones, You can enjoy the tax holiday in other free zones. The exposure of free zone permanent establishments doing business through mainland entities and the 0% withholding tax paid by mainland entities to free zones is another concept introduced in this part of the world and will have far-reaching implications in the future.
Free Zone Regulations and Interaction with Economic Substance Regulations (ESR)
The exemption conditions of the free zone may conflict with other provisions of the current law, such as the effect on the current Economic Substances Regulation (ESR). It is unclear whether there will be any changes to the UAE ESR after the introduction of corporate tax.
The purpose of introducing the ESR is to prevent multinational groups from artificially shifting profits to jurisdictions that levy little or no income tax in the absence of substantial economic activity in that jurisdiction; in other words, the introduction of the OECD and EU Global business tax standards to prevent harmful tax practices when doing business in the UAE.
In light of this, it is likely that the ESR will continue to apply to UAE entities and branches that benefit from free zone incentives. ESR may be phased out for entities subject to 9% corporate tax. Given recent developments in UAE ESR infrastructure, we do not expect it to be completely abolished, but its scope may change.
Likewise, attempts may be made to restructure free zone operations in terms of revenue sources, employee visas and use of assets to protect free zones from being taxed as mainland companies. The timing and manner of such a restructuring and the interpretation of the anti-abuse provisions in the proposed tax code will determine the likelihood and impact on corporate tax and other compliance.
Another important aspect is that when a free zone entity does not wish to enjoy corporate tax exemption, it can make an irrevocable choice to accept regular corporate tax or become part of a tax group to enjoy easier tax compliance and Benefit management from offsetting group company losses. In this way, it can continue its business without any impact.
Corporate tax planning and preparation is key
As such, there are important nuances in the fine print of the “conditions” for tax-free zone exemptions – they are often not easy to grasp or see through. MBG Corporate Services’ tax experts have extensive and extensive experience in solving complex tax issues for clients around the world and in the UAE.
contact us here Conduct a comprehensive corporate tax law impact assessment to understand its impact on your Free Zone business and what you must do about it.
*resource: Etes Cable
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