Dubai: The UAE Ministry of Finance recently conducted two awareness sessions on the corporate tax. The session held in Dubai on June 22 focused on free zones and associated tax benefits.
Such sessions are immensely helpful to businesses and other stakeholders. In addition to being well organised, the session provided important guidance on the tax implications on free zones entities.
Additional guidance, updates
The cabinet and ministerial decisions on free zone taxation introduced important terms such as qualifying income, qualifying activities, excluded activities and de-minimis. This should be considered as the start of the tax journey.
The authorities will be issuing additional guidance as to what some of these terms mean. An updated explanatory guide and a set of revised frequently asked questions (FAQs) is expected to be released, in addition to other important developments.
Distribution activities and third-port shipments
For companies in the import-export business, there has been a curiosity of the tax implications on direct/third-port shipments. For example, would tax be applicable if the goods are moving say, from India to Germany without even coming to the UAE? We have highlighted the potential tax implications in various scenarios.
The UAE is growing in its status as a financial hub, a logistics and distribution hub, and a manufacturing center. The tax regime intends to complement the status and future ambitions. For third-port shipments, free zone companies should be eligible for the 0 per cent rate. Businesses should however wait for future guidance and updates to evaluate the tax implications on the distribution activities undertaken from different free zones areas.
Free zone companies have often wondered how transfer pricing will be relevant if the income is taxable at 0 per cent. The requirement to comply with transfer pricing regulations and documentation requirements protects the integrity of the tax regime.
The privilege of having a 0 per cent rate comes with a set of responsibilities such as transfer pricing compliance and maintaining audited financial statements. The transfer pricing compliance will ensure that free zone companies are not engaging in profit-shifting activities to take an undue advantage of 0 per cent rate.
Adequate substance compliance
For any tax regime, the compliance conditions are as important as the benefits that it provides. Free zone companies are required to maintain adequate substance in the free zone. The core income generating activities (CIGA) must be performed within it.
Outsourcing of core income generating activities is allowed only to a related- or a third-party who are also in a free zone, subject to adequate supervision on those activities. The company must also have adequate staff, adequate assets or adequate operating expenditure in the free zone.
Having staff, assets and/or operating expenditure in the mainland may not qualify free zone companies for 0 per cent tax rate. There is no minimum level of substance prescribed in the law because every business is different. The substance compliance will be evaluated on an individual basis based on the requirements of respective business.
To provide adequate space to free zone businesses to transition into the regime, the de-minimis provisions have been incorporated based on global practices. Free zone companies having a mix of qualifying income and non-qualifying income in a year would still be eligible for 0 per cent tax rate only if the non-qualifying revenue is lower than both Dh5 million and 5 per cent of total revenue.
Certain income such as from commercial property in a free zone and income from domestic/foreign permanent establishments will remain outside 0 per cent and de-minimis irrespective of its quantum.
The awareness session was reassuring and helpful. The common feeling among the participants was that the tax regime will be business-friendly and that the tax authorities are duly addressing stakeholders’ concerns. As we all celebrate Eid al-Adha, the guidance and clarifications expected soon should help in comprehensively evaluating the tax implications on the FZ operations.
Wishing readers a blessed Eid al-Adha.