Alchemist- An accounting and consulting firm for your assistance.

Are free zone companies exempt from corporate tax in the UAE?

global

1660197791435_WhatsApp-Image-2022-08-04-at-9-24-48-AM-1-jpeg.jpeg

The United Arab Emirates, known for its highly favorable policies and ability to attract investors from around the world, has implemented a federal corporate income tax (CIT) that will go into effect on June 1st, 2023. The statutory CIT rate is set at 9%. In this post, we have outlined UAE's current tax framework and assessed the impact that the CIT could have on UAE businesses.

Taxation in the UAE

The United Arab Emirates has long attracted wealthy investors from around the world looking to establish a presence in the region while also benefiting from one of the most favorable tax regimes around the world in a jurisdiction with multiple bilateral double taxation contracts made with other countries.

The UAE has long been regarded as the region's world's leading financial, commercial, energy, and tourism center. Moreover, no tax on personal income applies to UAE residents. Only in 2018 did the UAE impose a standard 5-percentage-point VAT on goods and services sold domestically.

Nonetheless, the tax authorities, i.e. the UAE Finance Ministry, have declared that CIT will be implemented in the Emirates to fight international tax evasion and to collaborate with tax authorities from other countries. This is to establish a minimum global tax rate for multinational companies. They are probably referring to the agreement made by the Organization for Economic Cooperation and Development (OECD) with over 130 countries around the world to set a minimum tax rate of 15% for multinational companies.

New CIT Regime in the UAE

The new CIT will be imposed on business profits obtained from commercial activities in the country. Natural resource extraction is the only activity subject to a separate CIT at the Emirate level.

However, to encourage the growth of startups, the CIT rate is set at 0% for small companies with taxable profits of less than AED 375,000 (approximately USD 102,100).

Another reason for the UAE implementing the new CIT regime is the federal budget's reliance on revenue from oil sales. The UAE can bring more stability and assurances for the country's future prosperity by expanding from natural resource sales and generating revenue from somewhere else.

Moreover, the CIT rate of 9% is viewed as pretty low among global financial centres; for example, a 16.5% CIT rate is applied in Hong Kong for businesses deriving profits in the Hong Kong SAR territory.

What about companies that are registered in Free Zones?

Many different Free Zones can be found in the UAE, particularly in the Emirates of Dubai and Abu Dhabi. Many of these Free Zones provide various incentives to businesses, and many small and medium-sized enterprises have registered 100% foreign-owned subsidiaries without the need for a domestic stockholder. Companies that register in a free zone are also eligible for tax breaks.

The Ministry of Finance has stated that businesses registered in Free Zones will be subject to the new CIT; however, the tax incentives offered by the Free Zones will be honored by the new regime for businesses that meet all compliance requirements and do not conduct domestic business with mainland UAE enterprises or individuals. Further comments from the authorities are expected to add clarity and transparency to the situation.

Our Products and Services

Alchemist Accounting is one of the top accounting firms in Dubai, UAE, and provides comprehensive legal, compliance, and tax advisory support and consulting to businesses that want to or are already doing business in the mainland UAE and the Free Zones. For more information or in case of any questions, feel free to contact us.