As announced in January 2022, the United Arab Emirates will introduce a federal Corporate Tax (CT) on business profits that will be effective for financial years starting on or after 1 June 2023. The following statements are based on a Public Consultation Paper and do not necessarily reflect the final tax environment in June 2023. The tax rate will be 9% of the income (profit) exceeding AED 375,000.
1. No CT for income not related the UAE mainland
Companies and branches that are registered in a Free Zone will be within the scope of the UAE CT and subject to tax return filing requirements. The UAE CT regime, however, will honour the tax incentives currently being offered to Free Zone Persons that maintain adequate substance and comply with all regulatory requirements.
Consequently, a business registered and licensed in a Free Zone Person can benefit from a 0% CT rate on income earned from transactions with businesses located outside of the UAE, or from trading with businesses located in the same or any other Free Zone. The 0% CT rate may also apply to income from certain regulated financial services directed at foreign markets.
2. CT will be applicable to a mainland branch of a Free Zone Company
If the business registered and licensed in a Free Zone conducts business through a branch in the mainland of the UAE, such income (of the branch) will be taxed at the regular CT rate on its mainland sourced income, whilst continuing to benefit from the 0% CT rate on its other income.
3. Direct Transactions with the UAE Mainland
To prevent Free Zone businesses from gaining an unfair competitive advantage compared to businesses established in mainland UAE, any mainland sourced income will disqualify a Free Zone Person from the 0% CT regime in respect of all their income. In other words, such income will be subject to the CT. There will be, however, two exceptions:
3.1 Sales from a ‘Designated Area’
A business licensed and registered in a Free Zone which is a Designated Zone for Value Added Tax (VAT) purposes can benefit from the 0% CT rate on income from the sale of goods to UAE mainland businesses that are the importer of record of those goods. It has to be seen, whether this only covers transactions with a distributor who is registered under the UAE Agency Law or also with unregistered agencies.
3.2 ‘Passive’ Income not subject to the CT
A Free Zone Business can continue to benefit from the 0% CT rate if its income from the UAE mainland is limited to ‘passive’ income. This would include – inter alia – interest, royalties, dividends and capital gains from owning shares in mainland UAE companies.