UAE Corporate Tax: Busting the 11 myths around free zone businesses and tax obligations

Eleven ‘myths’ seem to have developed around the application of UAE’s corporate tax on businesses based in the free zone. It’s high time these were dispelled. 

Myth 1: Since we are a company holding a free zone license, we shall not be attracting any corporate tax.

Fact: The corporate tax is applicable on all type of free zone entities without discriminating on its activities. Entity may have ‘exempted income’ - or zero rate of corporate tax - provided it is ‘qualified free zone person’ with ‘qualifying income’ and satisfies the six conditions laid down by the FTA.

Myth 2: Being a free zone company in the designated zone in UAE, we do not require to register for corporate tax. And neither are we required to file corporate tax return.

Fact: A free zone entity is not exempt from corporate tax registration or return filing. All type of free zone licensed entities are required to register timely with FTA and file annual corporate tax returns within 9 months of the tax year end.

Myth 3: As a trading company in a ‘designated free zone’ in UAE, we automatically get the benefit of zero rate of corporate tax.

Fact: A free zone entity has to evaluate whether it fulfils the conditions laid down to claim zero rate. Only a qualifying free person can avail the benefit by opting on the corporate tax portal as it is not available by default.

An entity thus has to opt for a zero rate of corporate tax regime. if such option is not availed, then the free zone company will attract the 9% tax.

Myth 4: Our free zone company makes good profit while our UAE mainland company with the same ownership has big losses. We understand that we can form a tax group of these companies and offset the losses.

Fact: Free zone entities that opt for a zero rate corporate tax regime cannot form a tax group with a UAE mainland company. However, if the free zone entity is not availing 0% tax regime, then it can form part of corporate tax group with a mainland entity and it can absorb losses of another entity with which it has 75% common ownership.

Myth 5: We are a designated free zone company in UAE and have lots of transactions with related parties and connected persons. As we will opt for zero rate of CT, we should not bother about arm’s length principle for such transactions as either way our profit will not be taxable.

Fact: Free zone entities wishing to have a zero rate need to comply with all the six conditions mentioned in the tax law. One such condition is to follow the arm’s length principle in related-party and connected person transactions.

To avail 0% tax benefit, a free zone entity is required to confirm that its transactions with related parties and connected persons undertaken in accordance with Article 34 and maintained sufficient documentation in accordance with Article 55.

Myth 6: We are designated free zone entity, but our turnover is below Dh50 million. Hence it is not mandatory for us to have our accounts audited.

Fact: For free zone entities opting for 0% tax regime, it is mandatorily required to have its financial statement audited, irrespective of its turnover. Such a free zone assessee is also required to name the auditor when filing tax returns.

Myth 7: Our warehouse in the designated free zone has been given on lease to another free zone company. As we will opt for zero rate of CT, this lease rental income will not attract any tax.

Fact: Rental from commercial property located in the free zone leased to a free zone person is qualifying income and hence, zero rating is available. However, if the property is not a commercial or not given to a person in the free zone, then it will be taxable at 9% without considering it for de-minimis calculation.

One needs to ensure that the licensed activity of the free zone person is aligned to include the lease/rental activity.

Myth 8: We are preparing a consolidated financial statement in compliance with IFRS 10, which includes operations of non-resident entities. This will be sufficient for corporate tax reporting purpose.

Fact: Entity may need to prepare separate set of consolidated financial statement for entities resident in the UAE for tax reporting purpose. Unless such entities are in a ‘corporate tax group’, each license entity will file separate and independent CT return.

Representative (parent) entity may be required to prepare separate set of consolidated financial statement having financial results of only resident taxable subsidiaries/branches. Hence, there could be two separate sets of consolidated financial statements.

Myth 9: Withholding taxes paid in the other country will be deductible expenses if not refunded.

Fact: Withholding tax are direct taxes. it is not deductible as business expenses.

Myth 10: We are VAT group entities and hence, like VAT filings, we will also file CT returns on a group basis.

Fact: Unless the entity applies to FTA separately to form CT Group registration, it cannot file a corporate tax group return. Instead, it will be required to file corporate tax returns individually for all the entities.

An entity must apply to FTA for corporate tax group registration for a particular taxable year before the end of that taxable year.

Myth 11: We are a free zone company providing professional consulting service to clients located in the mainland. But being a free zone entity our income is exempted from corporate tax.

Fact: Professional services provided from free zone to mainland is a non-qualifying activity and will be subject to 9% CT. This non-qualifying income will be added for de-minimis calculation.