UAE corporate tax: New businesses may consider issuing separate licenses for free zone, mainland operations

Dubai: New businesses entering the UAE should consider obtaining a separate license if they plan to operate in the mainland and free zones. This dual licensing scheme may be the best way to deal with their upcoming corporate tax obligations.

Because under the CT rules, while Free Zone based businesses are generally taxed at 0%, those businesses that derive a significant amount of income from their mainland business will pay the full 9% tax.

This is why new businesses could consider obtaining dual licenses for free zone and mainland-focused operations, keeping as much separation as possible, consultants said. “It’s quite possible,” said Atik Munshi, managing partner at consultancy Finexpertiza UAE.

“There are dozens of export-oriented companies that have set up bases in UAE free zones, and the zero-tax rate is very attractive for these entities.

“Even in the UAE mainland, there are some companies that have a lot of export earnings because the UAE is traditionally a trans-shipment centre.

In this case, Continental could consider setting up a free zone entity for its export services to take advantage of the zero rate. “

Issues over free zone licenses and corporate tax obligations have been part of a lively debate since the UAE announced that it would start collecting taxes from June 1, 2023. The authorities also confirmed that there will be no taxation on pure free zone businesses. This means, for example, that a company exclusively exporting/re-exporting from its free zone will receive a 0% tax rate.

But any direct or indirect business on the mainland offers a different picture. “Companies that do a lot of business with the mainland will need to readjust,” Munshi said. “We found that most multinationals operate through corporate networks of ownership and control.

“They will have warehousing or logistics centers in free zones and retail outlets on the mainland. There is extensive interconnection between these entities. At times, both warehousing and retail appear to be separate profit centers and function in competition – but They are connected to each other through corporate networks anyway.”

Another option for income earning businesses is to set up a “holding company” structure in a free zone to reap the benefits of tax-free dividends and interest. But make sure to have substantial equity in this structure, backed by ample cash reserves.

“Whether dividends and interest earned by holding companies will be classified as ‘qualifying income’ is unclear, but the assumption is that all such income may be subject to 0% CT,” said partner Nimish Goel. WTS Dhruva Consultant.