Dubai: Free zone businesses in the UAE need to think hard – should they sign up to pay the 9% corporate tax (CT). Because if they did sign up to the 9% annual tax payout, those businesses would have more flexibility in how they deal with losses incurred by companies operating on the mainland.
“If a free zone enterprise chooses to pay corporate tax at a rate of 9% and does not apply for tax exemption, it can apply for tax losses of its mainland subsidiary by forming a group or transferring losses according to conditions,” Manoj said. Agarwal, Founding Partner and CEO of AJMS Tax.
According to the UAE CT rules, the tax rate for free zone enterprises is 0%. However, a large number of businesses with regional headquarters in UAE free zones also have extensive interests in mainland China. Free zone businesses will therefore have to decide quickly whether they should sign up to the 9% tax rate – and claim some benefit from it – especially when dealing with financial year losses.
Pursuant to Article 37 of the UAE CT Law, no adjustment will be allowed for losses of certain entities prior to the effective date of the law. For example, businesses whose tax year begins in January 2024 will not be able to offset losses made before December 31, 2023. Furthermore, losses can only be set off against up to 75% of the taxable income for the relevant tax period in which those losses are being set off.
-Manoj Agarwal, AJMS Tax
The rules say this:
> If a “free zone person” meets the required conditions and becomes a “qualified free zone person” (QFZP), the income earned by the QFZP is called “qualified income” and the tax rate is 0%.
> Free zone companies and mainland companies cannot shift tax losses if the 0% tax rate applies.
There is still one way for free zone businesses with mainland companies to claim for tax losses. Free zone entities can claim tax losses for their mainland subsidiaries if they choose to pay CT at the 9% rate and do not claim the exemption. This is done by forming a “group” or by transferring losses, depending on the conditions.
“Typically, losses can be carried forward for a period of time or adjusted for certain conditions, and UAE CT seems to be more liberal than other established tax jurisdictions,” Agarwal said.
“In some cases, such as holding an equity interest/continuing the same business activity, the loss can be up to 75% of the adjusted taxable income. Globally, these conditions generally do not exist because for tax purposes, business entities are classified as Treated as a separate legal entity.
“Furthermore, changing business activities or continuing to hold the same shareholding may place an additional investigative burden on the business.”
Wait for more clarity on CT rules
“When it comes to the tax treatment applicable to free zone entities, the CT Law makes numerous references to future UAE cabinet decisions,” said Nasheeda, founder of Nishe Accounting & Consulting. “This makes it difficult for free zone businesses to ascertain their tax status and responsibilities at present. .
“In my opinion, the need to clarify this topic is understandable, as the UAE CT rules must comply with the tax benefits promised by the free zones, which are an important part of the UAE economy. And maintain the continental and free zone Fairness among businesses while keeping tax rules simple and loophole-free.
“All of this will obviously require some smart management.”
If there is 75% or more joint ownership, the law allows offsetting the taxable profits of one entity against the tax losses of the other entity. If the parent-subsidiary structure has a joint ownership of 95% or more, the law allows tax grouping of entities so that only one consolidated tax return needs to be filed for all entities in the tax group.
– Nasheeda of Nisheeda
Larger business groups in the UAE, listed entities and entities whose fiscal year begins in June have opened up corporate tax-linked registrations. Currently, registration is only required for businesses that are invited to register, but the network will soon expand as the timeline approaches June 1, 2023, when the UAE corporate tax regime will come into effect.
“We applaud the Federal Tax Authority (FTA) for successfully launching pre-registration on its EmaraTax platform,” said Hussain Sajwani, chairman of Dubai-based Damac. “Through this measure, digital tax services in the UAE will be easily accessible and companies in the country will be able to report their corporate taxes efficiently.”
The FTA has been running a series of workshops and seminars to filter its message to businesses and make registration as cumbersome as possible. It is eagerly anticipated that the FTA will open up the CT registration process to more companies.
As tax advisors and business owners say, registering for VAT helps to understand the process – but no one should mistakenly assume that the requirements are the same.
Small businesses with an annual revenue of up to AED 375,000 will be subject to 0% corporate tax. But SMEs in the UAE can also reap other benefits from the new tax regime.
“There is the concept of small business relief. Using this, small businesses with revenues below a certain threshold (not yet notified) may be subject to simplified compliance obligations,” said Dr Nabeel Ahmed, partner at DVS Management Consultants. “And (these will) be deemed to have no taxable income for the relevant tax period.
To apply for small business relief, there must be an “election” to the FTA. In short, SMEs must choose to take advantage of this relief.
– Dr. Nabeel Ahmed, Partner, DVS Management Consulting.
“As for who can apply for this small business relief, any UAE resident legal entity or individual whose income is below the threshold set by the Minister and meets any other conditions that may be set may apply for the small business relief.”
The Most Anticipated Corporate Tax Update
Businesses are awaiting the cabinet’s decision and administrative regulations. As stated by Dr. Nabeel Ahmed, the following are some of the topics that will be determined by further administrative action.
What is the threshold for small business relief?
For companies established in Liberty Zznes, the publication of the Cabinet decision detailing the concept of “qualified income” is crucial to gain a clear understanding of how the new CT will affect business activity in the UAE.
Which categories of income earned by non-residents are subject to withholding tax?
Any other expenditure that constitutes entertainment expenses and is deductible from taxable income. and any other non-deductible expenses other than those listed above.
What are the criteria for determining the link between the “country” and a non-resident individual for purposes of determining taxable income?
UAE corporate tax and free zones
How UAE corporate tax would define a ‘qualified free zone person’ was the subject of intense debate from the moment the concept was introduced, as free zones specifically mentioned tax exemption as the main incentive offered to companies wishing to register with them measure.
“By far the most awaited update by businesses is the list of designated free zones for corporate tax,” said Nimish Goel, partner at WTS Dhruva Consultants. “Then there is the list of eligible income for people in the Free Zone, where the tax rate is 0%.
“Given the number of entities in the UAE free zones, this number is critical.”
If a free zoner meets the required conditions and becomes a “qualified free zoner”, the income earned is called “qualifying income”.
Qualifying income is taxed at 0%.
Free zone enterprises and Mainland companies cannot shift tax losses if the 0% tax rate applies.
Article 38(1) states that, as one of the conditions for loss of transfer tax, “neither a tax exempt person nor a qualified free zone person”. A tax group can only be formed if neither the parent company nor the subsidiary is an exempt person.
If a free zone enterprise chooses to pay corporate tax at a rate of 9% and does not apply for tax exemption, it can declare the tax loss of its mainland subsidiary by forming a group or transferring losses.