Corporate Tax applicability for Freezone Companies

September 26, 2022Dated:  | |

Freezone companies are exempted from corporate tax in the UAE. Recently, the UAE government announced that it will be incorporating corporate tax starting 1st June 2023. The free zones have been providing a series of exemptions for businesses unlike the businesses operating on the mainland.

The freezone companies are required to understand their corporate tax obligation which they can understand by consulting with the FC Tax Consultants. They will brief you on the requirements and what necessary steps to get exempted from corporate tax.

Are freezone companies eligible for 0 percent corporate tax?

The income retained from the following transactions will be benefiting from the O percent CT

  • Transactions with businesses located outside the UAE.
  • The trading with businesses located in the same or any other freezone.
  • There are certain regulated financial services directed at the foreign market sales of goods i.e. (VAT designated zones) to customers on the mainland if the customers are the importer on the record.

There are certain sets of income that are eligible for 0 percent CT 

  • Passive income is generated by the Freezone company which doesn’t have any branches on the mainland. Passive income is generated from the royalties, interest, dividends, and capital gains from owning shares of mainland UAE companies. However, the associated payments made by the mainland entities will not be deductible for UAE CT purposes. 

The 0% tax rate will apply to the income earned by the Freezone entity located in the designated zone for value-added tax from the sales of goods to UAE mainland businesses who are importers of those goods.

The transactions between free zone entities and these group entities located in the mainland UAE are subjected to 0% tax. This payment wouldn’t be applicable for transactions between the UAE mainland entities and the UAE mainland branch of a freezone entity. 

However, in later stages, it will be subject to UAE CT at the applicable rates. The free zone entity has the leverage to make an election to become subject to regular CT in the UAE.

The freezone companies will need robust accounting records for allocating expenses and determining the net income from each of the above transaction streams.

Are there any conditions that free zones companies are required to meet for the eligibility for 0 percent corporate tax?

The freezone companies will be required to maintain adequate substance that complies with all the specific requirements.

  • The maintenance of adequate substances requires meeting the tests of Economic substance regulations. The presence of adequate manpower, assets, and income-generating activities in the UAE. This entity must be directed and managed in the UAE.

Will the services supplied by Freezone companies be subjected to CT?

The income generated from transactions with businesses located outside the UAE will benefit from the 0 percent CT. The income that comes from services supplied to the customers in the mainland UAE or free zones should be covered under 9 percent CT.

The Fyingcolour Tax Consultants in Dubai can help you prepare for corporate tax and make you aware of the new tax regime in Free Zones. We help the companies in the preparation of the relevant documents and help them understand the scope of the tax in the long run.

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