New Dubai free zone rule clears way for 'more' business activities on Mainland

Dubai: Allowing more business activities on the mainland by free zone based companies in Dubai will be the single biggest incentive through the new incentives announced by the Dubai Government. The move assumes extra significance given that the UAE now has a corporate tax regime.

A second big boost would be if other emirates too allow free zone enterprises to launch multiple business activities through a branch on the mainland.

“Even before the new Dubai announcement, the UAE’s tax rules permit free zone companies to have branches on the mainland,” said Atik Munshi, Managing Partner at the consultancy Finexpertiza UAE. “But due to procedural restrictions, the licensing authorities were not allowing branch licenses for most activities.

“Now, with the clarification that DET (Department of Economy & Tourism) in Dubai will start issuing such updated branch licenses, other emirates too could follow suit.”     

Dubai for some years has allowed businesses in the free zone and mainland to operate on a unified license. The latest announcement scales up possibilities for businesses, especially new entrants, to opt for. But with the UAE announcing that enterprises in the country will come under the corporate tax, it led businesses with free zone and mainland operations to wonder whether they would have to repurpose these operations.

Now, the latest Dubai initiative should help smooth out the process.

"Dubai is adding more flexibility and scope for free zone companies to expand business in UAE mainland but this comes with a caution considering the corporate tax regime now in place in UAE," said Jai Prakash Agarwal, Vice-Chairman at ICAI Dubai Chapter.

Under UAE corporate tax, companies operating in designated free zones are eligible for 0% tax against the 9% elsewhere in the country. But these businesses need to meet certain provisions to be eligible.

“Though the corporate tax rate is low in UAE, many trading businesses traditionally operate on low net margin and they thrive on volumes,” said Munshi. “Free zones would be ideal for such companies.

“Now that free zones are allowed to open branches on the Dubai mainland, any physical presence inconvenience is also eliminated. But they would be required to maintain independent records for tax purposes.”

The DET - in coordination with the licensing authority - must issue a list of economic activities that businesses can conduct in Dubai within six months. This will depend on whether they hold a branch license in the emirate, a branch with headquarters in the free zone, or a permit for specific activities.

"My recommendation to businesses will be to ensure proper demarcation of business between free zone company and mainland branch," said Agarwal. "(This should be) not only at the time of starting the mainland operations but also set up a monitoring mechanism for continuity of 0% corporate tax relief.

"Else, the business may lose that relief and once relief is lost, you lose it for 5 years consecutively."

All establishments operating outside the free zone and within the emirate of Dubai must comply with the new provisions within one year from its effective date. (If needed, the Director-General of the DET may extend this period for an additional year.)

"Earlier, the free zone company had to get an NoC from the free zone authority to open a company or to rent the office for the mainland license," said Jeet Gianchandani, Founder Partner at JCA. "Now, it will not be required.

"Also, some activities on the mainland will be subject to approval from the DET. We have to await for some more clarifications on this."

Conditions for free zone entity to be rated at 0% for corporate tax