Application of Corporate Tax on the Manufacturing Companies in the UAE

The corporate tax law (the law) in the UAE applies to the companies involved in the manufacturing, toll manufacturing, contract manufacturing and processing of goods and material (hereinafter referred as “manufacturing and processing companies”, or “MnPC”), unless they qualify for exemptions or operate as natural persons with an annual income of less than one million dirhams.

Contract manufacturing means outsourcing the full-fledged manufacturing including the sourcing of material while in the toll manufacturing, material and design are provided to the manufacturer and manufacturing is outsourced. Processing of goods and material means the preparation, treatment, transformation or conversion of goods and materials into another form of material for further commercial or industrial use or sale. If the goods and materials are not being processed for sale or further commercial/industrial use, it will not all under the qualifying activities.

These manufacturing and processing companies can be categorized as either resident MnPC or nonresident MnPC. The resident juridical MnPC are established in the UAE or established out of the UAE but controlled and managed from UAE, are subject to CT on their worldwide taxable income, while a sole establishment, civil company or individual having a freelance manufacturing business in the UAE, is liable to pay CT on their worldwide income related to their UAE business only.

Whereas MnPC are doing business as a natural person, their taxability is the same, regardless of whether they are in the free zone or out of the free zone. As an exception, such taxable persons are not liable to pay corporate tax and they are not even liable to register if their annual business income is up to one million dirhams within a Gregorian calendar year. If their annual business income is up to three million dirhams, like a juridical person they can avail exemption from corporate tax till the end of 2026. If their business income is more than three million dirhams, for taxable income of Dhs 375,000, zero percent corporate tax is applicable and any income beyond Dhs 375,000, is subject to tax at nine percent.

The application of corporate tax on the juridical MnPC depends on their location and level of income. If the annual income of MnPC is upto three million dirhams, they can avail exemption from corporate tax until the end of 2026, and if their annual income is more than three million dirhams, they are subject to tax, and for better understanding, we can classify these MnPCs as "free zone juridical MnPCs" and "non-free zone juridical MnPCs".

Free Zone Juridical MnPCs

If any MnPC is registered as a limited liability company, public joint stock company etc. we can call it as juridical MnPC, and where such company is registered in the free zone, we can name it free zone juridical MnPC. If such free zone person meets the criteria of qualifying free zone person, we can name it as “Qualifying Free Zone Manufacturing and Processing Company (QFZMnPC) and there are special provisions in the law for the QFZMnPC.

It has been given in the MD 139/2023, if the QFZMnPC is manufacturing or processing goods for another free zone person (except natural person), then income of QFZMnPC from such activity is considered Qualifying Income (QI) and it is subject to tax at 0%. For example, A Ltd, a QFZMnPC, is sourcing material and manufacturing goods for B Ltd, another company registered in the free zone. The compensation for material, labor, overheads along with margin provided to A Ltd will be considered their QI, and it will attract zero percent corporate tax because manufacturing services are being provided to another free zone person.

Where, the QFZMnPC is providing the manufacturing services to the non-free zone person located either on the mainland of the UAE or out of the UAE, then manufacturing income is still considered QI as it falls under qualifying activities of the QFZMnPC. Let's say there's a company called P Ltd, which is a QFZMnPC. If P Ltd is manufacturing goods for the UK company and/or UAE Mainland company. The income of P Ltd from this transaction is categorized as QI.

Where de minimus criteria are not met, QFZMnPC ceases to be a QFZMnPC from the beginning of the relevant tax period and for the subsequent four tax periods.

Non-Free Zone Juridical MnPCs

Non-free zone manufacturing and processing companies are not eligible to enjoy the zero percent QI exemptions and will be liable to taxes on their worldwide income if they are considered resident entities. For instance, let's consider Kcobs§ Ltd, a manufacturing company registered in the UAE mainland. The manufacturing services provided by the Kcobs Ltd will be subject to tax since Kcobs Ltd does not meet the criteria of a qualified free zone person. The income derived from the customers will be classified as taxable income. In such transactions, the location of the customers does not affect the classification of the income.

The permanent establishment (PE) of the non-resident MnPC will be liable to tax in the UAE like a juridical person in the UAE but their income attributable to PE will be subject to tax in the UAE instead of the worldwide income of the MnPC. If the non-resident MnPC is earning any UAE sourced income, it will be subject to zero percent withholding tax, and in case of any nexus in the UAE, like investment in the immovable property, the non-resident MnPC will be liable to register, submit the return and pay the CT in the UAE.

The companies which are involved in manufacturing and processing of the goods in the UAE, they need to assess their position, to get the benefit of zero percent CT on the QI. Where the nonresident MnPC have PE or nexus in the UAE, they need to equip themselves to be CT compliant.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official opinion of the Khaleej Times but an opinion of the writer. For any queries/clarifications, please write to the writer at?[email protected] .