UAE Corporate Tax: The Importance of Free Zone Businesses Maintaining Separate Financial Accounts

Free zone-based businesses will find separate statements can help with 0% tax status?

Dubai: Businesses with a UAE free zone license – or expecting to get one – have all the clarity they need on what qualifies them for 0% corporate tax. But they still have to put in some extra effort to make sure they remain eligible for that 0%.

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.

?Free zone incentives?

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

?Accounting requirements?

The Federal Tax Authority requires free zone entities to:

- Maintain all records and documents required for corporate tax purposes for 7 years following the end of the tax period to which they relate.

- Although the corporate tax law does not require a free zone person to maintain separate financial statements for activities that generate qualifying income (for 0% tax), sufficient documentation is needed to demonstrate how qualifying income is calculated.

According to consultants, maintaining diligent financial statements, even separate ones, can help. The bifurcation of revenue would show clearly whether a free zone entity’s revenues are ‘qualifying’, ‘standard rated’, or ‘exempt’.

Once this is done, it’s easier to determine whether the revenues represent non-qualifying or qualifying for corporate tax. The bifurcation of revenues is not difficult as long as the company’s accounting systems are designed accordingly. Most companies would need to alter their chart of accounts to bifurcate qualifying and non-qualifying portions to suit corporate tax requirements.

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 a 0% rate on UAE corporate tax provided they fulfill the required conditions. The qualifying income for 0% extends 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, but some conditions need to be satisfied.

Burden of proof

Some consultants say maintaining separate financial statements is not necessary 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 up to individual businesses to decide what works best.”

Compliance failures can be costly?

Businesses in free zones must understand the impact of non-compliance, as it could lead to the payment of tax at 9%, not only for a particular tax period but for 4 successive tax periods. New businesses must check the FTA guidelines for a comprehensive insight into the tax environment in a free zone, aiding informed decision-making and strategic planning. New entrants can plan their business operations to maximize tax benefits from the start. Knowing their tax obligations and benefits allows new businesses to create accurate financial projections and budgets.

Stay compliant, maximize your benefits, and ensure your financial practices are robust.

For more detailed guidance, consult with our tax expert today!

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Source: Gulf News

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