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Friday, September 22, 2023

UAE Corporate Tax: Why UAE Free Zone Businesses Must Stay On The Right Side Of “5% Of Gross Income Or AED 5 Million”


Dubai: Now that free zone businesses in the UAE have a clear idea of ​​what “qualifying income” should be, their focus should always be on two figures when it comes to corporate tax.

In any future tax periods, these businesses must always meet a requirement that their “non-qualifying” income not exceed 5% of their gross income or AED 5 million, whichever is lower. (This is called the “floor” threshold.)

If these figures are violated, free zone based businesses will no longer benefit from the 0% corporate tax.

Extended for 5 years.

In effect, they will be considered taxable businesses, obliged to pay their own 9% corporate tax. If their income for the year exceeds Dh375,000.

“The tax rules recognize the continued importance of free zones to the UAE economy and their tax-related commitment,” said Deepak Bansal of AskPankaj Tax Advisors. “The benefits of a free zone place a strong emphasis on tax compliance – and sound accounting – thus making it a key area of ​​focus for business owners.”

In other words, a free zone business must always fly below the two limit for all of its disqualified income, which is basically anything that isn’t a 0% rating.

“If the minimum requirements are not met or if the free zone entity does not continue to meet any of the qualifying conditions, they will not be able to enjoy the corporate tax exemption,” said James Swallow, commercial director of PRO Partner Group.

“This means that free zone entities cannot engage in mainland UAE business above this threshold. If they do, then all income will likely be taxed at 9 percent.”

Jeet Gianchandani of Jitendra Consulting Group said, “Even with lower barriers to entry, all the incentives offered to free zone businesses will be a great consolation.

Free zone enterprises to decide

As has been its standard practice throughout, the Treasury has provided free zone businesses with considerable flexibility as to where they stand in the corporate taxation process.

If these businesses also have substantial operations in the Mainland, they cannot seek to be part of the standard corporate tax regime and thus fall within the 9% range. They can choose the 0% state if the operation is limited to within or between free zones.

These businesses must confirm with their respective free zone authorities whether the center is eligible for 0% status.

sale of commercial real estate

Another important provision in the Free Zone Business Guidelines relates to the sale of commercial real estate.

Free zone corporations are taxed at the standard 9% rate on income from commercial real estate transactions located in the free zone. and transactions are with non-free zone buyers.

The 9% income also includes income from residential and other non-commercial properties within the free zone.

However, these free zone businesses will not be disqualified from tax-free zone business tax coverage because of these income inflows.

Free zone businesses need to go into all the details of these guidelines. As mentioned earlier, the Commerce Department has given a considerable degree of flexibility to these businesses to decide for themselves how to deal with corporate tax.

Keep track of “prerequisites”

Free zone businesses must understand the prerequisites to be considered a “qualified free zone person”, including the substance and transfer pricing requirements under section 18 of the Corporations Tax Act.

“The concept of free zone under the corporate tax law is completely different from the UAE VAT. As the purpose of the corporate tax law is to fulfill the commitments made by the free zone authorities to businesses, businesses located in all free zones should be considered eligible upon fulfillment of the pre-conditions are considered as ‘Qualified Free Zone Persons’.”

– Raju Menon, Chairman and Managing Partner, Kreston Menon


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