Foreign companies managed in the UAE will be subject to the CT regime

Free zones strongly support the UAE’s economy by attracting foreign direct investment.

Inayat-ur-Rahman, business editor

The concept of residency is a key factor in determining whether corporate profits should be taxed under the UAE Corporate Tax System (CT). Legal persons incorporated in the UAE, such as limited liability companies, private joint stock companies, public joint stock companies and other entities, will be considered “residents” under the CT regime. Foreign companies that are effectively managed and controlled in the UAE will be subject to the CT regime.

Tax Arslan Mushtaq, partner at athGADLANG, revealed this in an exclusive interview with Gulf Today.

“Natural persons, including sole proprietorships, sole proprietorships and individual partners in unincorporated partnerships engaged in business activities in the UAE, will be subject to the CT regime. Under the CT regime, legal persons’ global income and natural persons’ income from business activities in the UAE income will be taxed.”

“The taxable income of a permanent establishment (PE) of a non-resident individual in the UAE and income derived from the UAE will be subject to the CT regime. The concept of a PE in the CT regime is designed in accordance with the OECD Model Tax Convention, in which Article 5 Outlines internationally accepted principles for determining what constitutes a PE. This will help foreign companies use the OECD’s extensive comments on Article 5 to assess whether they have a PE in the UAE,” added Mustak.

“The foreign business will trigger a permanent establishment in the UAE if it has a fixed location in the UAE from which to conduct business in whole or in part. Typically, to manage premises, branches, offices, factories, workshops, real estate and conduct activities Construction sites older than 6 (six) months are considered fixed premises.”

“Furthermore, installations, mines, oil or gas wells, quarries and structures used to explore for natural resources will be considered PE. Displaying or delivering goods or storing goods for the sole purpose of making them available to others for processing will not constitute a permanent establishment in the UAE,” concluded Mustaq.

“In the absence of a fixed place of business in the UAE, foreign businesses may also trigger a permanent establishment under ‘reliance on agents’,” said Rashid Ghulam Akbar, FTA agent at athGADLANG. “Generally, the reliance agent test will apply if a business traveller or an Emiratis acting on behalf of a foreign business has the right to enter into contracts in the name of the foreign business without substantial intervention by the foreign company,” Akbar added.

“Free Zones strongly support the UAE economy by attracting foreign direct investment and facilitating doing business. The CT Regime outlines that businesses operating in the Free Zone will be subject to the CT Regime and meet compliance obligations such as registration and filing CT returns. However, the CT regime will honor a 0% tax benefit provided that the free zone business maintains sufficient substance and complies with all regulatory requirements. Free zone businesses may receive income from transactions with businesses outside the 0% CT rate on income from transactions conducted by businesses in the District and certain regulated financial services from foreign markets.”

“Free zone businesses with branches on the mainland of the UAE will be subject to a 9% duty rate on income earned from the mainland and 0% on other income. However, free zone businesses that do not have branches on the mainland can Passive income such as interest and royalties, dividends and capital gains on mainland company shares enjoy a CT rate of 0%. Passive income will be subject to 0% withholding tax. Any other mainland source income other than the 0% CT rate will not be eligible.”

“From a VAT point of view, Free Zone businesses located in designated areas can benefit from revenue from sales of goods to businesses in the UAE mainland, which are importers of these goods.”

“The 0% tariff rate will apply to transactions between the Free Zone business and its group companies located in the UAE mainland, but payments to the Free Zone business will not be a deductible fee to ensure the customs neutrality of such transactions.”

“Free zone businesses should start conducting high-level impact assessments to assess their business models, legal structures and economic substance requirements to take advantage of the 0% CT tax rate,” Akbar concluded.