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Many UAE tax advisors are suggesting free zone businesses should consider maintaining 'bifurcated' financial statements. That this will help them in providing transparency in claiming 0 per cent eligibility on corporate tax. Image Credit: Shutterstock

Dubai: With the latest guidelines being issued, businesses with a UAE free zone license – or expecting to get one – now have all the clarity they need on what qualifies them for 0 per cent corporate tax.

But they still have to put in some extra effort to make sure they remain eligible for that 0 per cent.

As for new businesses wanting to sign up, “they should check whether it is a ‘free zone’ or a ‘designated zone’ and what its status is under UAE corporate tax rules,” said Atik Munshi, Managing Partner at Finexpertiza, the consultancy.

“Of course, that means whether their business revenues would fall under qualifying activities or not. And they also need to ensure they meet the ‘adequate substance’ requirements.

Once the business signs up with a free zone, they need to ensure that, apart from other norms, their accounting system is robust to provide the ‘bifurcated’ information for corporate tax purposes.

- Atik Munshi of Finexpertiza

Free zone incentives

Right from the time the UAE announced its corporate tax plans, it was made clear that free zone businesses will be eligible for 0 per cent tax provided a set of conditions were met. This is where the ‘qualifying free zone’ and ‘designated free zone’ norms took effect. Since then, the Federal Tax Authority has kept businesses and the markets updated with guidelines and best practices on the many facets related to a free zone representation.

Accounting ways

This is what the Federal Tax Authority requires free zone entities to follow:

  • Maintain all records and documents required for corporate tax purposes for 7 years following the end of the tax period to which they relate.
  • • The corporate tax law does not require a free zone person to maintain separate financial statements relating to activities that generate its qualifying income (for 0 per cent tax). However, in all cases, the free zone entity would need to have sufficient documentation to demonstrate how it calculated the qualifying income.

This is where maintaining diligent financial statements, even separate ones, can help, according to consultants.

The bifurcation of revenue would show clearly whether that particular free zone entity’s revenues come under ‘qualifying’, ‘standard rated’ and ‘exempt’.

“Once this is done, it’s easier to arrive at a conclusion whether the revenues represent non-qualifying or qualifying for corporate tax,” said Munshi.

“The bifurcation of revenues is not difficult as long as that company’s accounting systems are designed accordingly.

“Most companies would need to alter their chart of accounts to bifurcate qualifying and non-qualifying portion to suit the corporate tax requirements.”

And these accounting and legal records as well as supporting documents must be maintained by such companies for at least 7 years.

  • A free zone entity can claim 0% rate on UAE corporate tax provided they fulfill the required conditions. The qualifying income for 0% extend to 13 activities for a free zone based entity.
  • Non-qualifying income or excluded activity income will be taxed at the standard rate of 9%.
  • Income from dividends may be exempt for many entities. Here too some conditions need to be satisfied.

‘Burden of proof’

Some consultants say maintaining separate financial statements is not necessary to provide as evidence. “The burden of proof on qualifying/non-qualifying revenues can easily be met by the invoices generated by the company during the tax year,” said one consultant. “It’s for individual businesses to decide what works best.”

Compliance failures can be costly

“Businesses in free zones must understand the impact of any non-compliance, as it could lead to the payment of tax at 9 per cent,” said James Mathew, CEO and Managing Partner at UHY James. “That’s not only for a particular tax period but for 4 successive tax periods.

New businesses must check the new FTA guidelines for a comprehensive insight into the tax environment in a free zone, which will aid informed decision-making and strategic planning.

- James Mathew of UHY James

“New businesses must check the new FTA guidelines for a comprehensive insight into the tax environment in a free zone, which will aid informed decision-making and strategic planning.

“New entrants can plan their business operations to maximize tax benefits from start. When it comes to planning, knowing their tax obligations - and benefits - allows new businesses to create accurate financial projections and budgets.”