UAE Corporate Tax Public Consultation Impact on Free Zones

UAE Corporate Tax: Public Consultation Impact on Free Zones

UAE free zones have been a key component of the UAE's wealth system for more than four decades.

With the introduction of corporate tax in the UAE, there is a doubt that the free zones will be adversely affected. UAE Corporate Tax Public Consultation Document existing tax incentives are respected for free zones.

The government has expressed its commitment to keeping free zones attractive by expanding corporate tax incentives. Businesses operating in free zones should review their existing supply chain and operational structure and restructure wherever necessary to ensure compliance with the conditions for claiming the benefit of a 0% CT rate.

If businesses set up FZPs for financial housing to maintain sufficient substance, comply with regulatory requirements, and benefit from a zero percent corporate tax rate.

With domestic transfer pricing and a corporate tax regime in place, now is the time to check and insulate your FZP's income from the 9 percent corporate tax.

0% CT applicable to FZ businesses in the following cases:

• An FZP deriving trading income from transactions with FZPs 
• An FZP deriving passive income (interest, dividends, royalties, and capital gains) from the mainland
• An FZP deriving income from a mainland group company.

Rental income is currently not mentioned in the category of passive income.

Income derived from the sale of goods through an FZP located in a designated zone for VAT purposes is not subject to the 0% CT rate as it imports a Mainland business record.

Also, if an FZP has a branch in the UAE, it will be taxed at 9% on mainland-sourced income and 0% on other income.

An FZP deriving any mainland source income other than that mentioned above will lose the benefit of a 0% CT rate with respect to all its income.

Tax implications on FZPs in terms of transactions with the mainland will be one of the critical aspects of the UAE Corporate Tax regime. Transactions undertaken by FZP with the mainland need to be cautious about the permissibility of the said transactions as non-compliance with regulatory requirements will lead to the denial of the benefit of 0% CT rate for all income streams.

In the absence of detailed guidance in this regard, the method of allocation of income to a mainland branch of FZP will be subjective. It also needs to be checked whether compliance with financial material restrictions is sufficient. Some clarification in the final rule may help in this regard.

Whether MNEs (Multinational Enterprises) operating in Free Zones in violation of the Pillar Two threshold will be given a 0% CT rate benefit.

Perhaps, this is the perfect time to review business operations, maximize profits under the 0% tax rate, and prepare for the 9% corporate tax.

It should be clarified whether MNEs (Multinational Enterprises) operating in free zones will be given a 0% CT rate benefit in violation of the pillar two thresholds.