UAE Corporate Tax: Are free zone based Special Purpose Vehicles still needed?

Dubai: On the face of it, taxing those free zone based companies in the UAE with mainland operations would seem a straight forward process. Income generated from the mainland if they cross the income threshold, then a 9 per cent tax rate applies. While pure-play free zone entities stick with zero per cent.

But is it as linear as that? Investments by free zone enterprises into mainland operations come in various forms, not least Special Purpose Vehicles (SPVs). In an interview, Fazeela Gopalani, Head of ACCA Middle East, says it would be too early to rush into judgement into whether SPVs still serve a purpose or not.

There have been free zone based SPVs with significant property and other investments or operations on the mainland. Are companies better off ditching the SPV status?

The UAE corporate tax law confirms that qualifying free zone entities will be subject to zero per cent tax on qualifying income and 9 per cent on non-qualifying income. The law so far does not provide any details on what constitutes qualifying income, and this detail will be provided in subsequent legislation.

Therefore, the tax treatment for SPVs that have operations in the mainland will depend on how those are structured, the nature of the income generated by the free zone SPV, and also the definition of qualifying income. It may potentially be that the free zone company still benefits from 0 per cent corporate tax in respect of the some of the income.

It’s worth preserving the SPV status until the legislation clarifies the meaning of the qualifying income has been released.

So, apart from defining what constitutes qualifying income for free zone entities, what else can be expected for such operations?

The Federal Tax Authority will issue also guidance to free zone companies on how these previsions will be interpreted.

When will the first UAE CT payments need to be paid?

There is no fixed date for the payment of corporate tax and will depend on the company’s taxable year. This in turn will depend on the company’s financial year.

Corporate tax will be due and payable 9 months after the company’s taxable year. For example, if the company runs on a calendar year, the first taxable year would be January 1, 2024 to December 31, 2024 and therefore the corporate tax will be required to be paid the end of September 2025

According to you, which are the Top 3 additional clarifications UAE companies will need?

The one on free zones – that’s very important for the UAE as many companies operate from there. We need to wait for the legislation to know how FZ companies will be treated.

We know that individuals are only subject to corporate tax if they have a business in the UAE and in certain circumstances. Defining the parameters how an individual will be affected is very important.

The UAE tax law has some provisions providing tax relief on re-organisations. It would be good to have more clarity on how this is expected to work.