UAE Corporate Tax Part 4

First of all, thanks to all the followers for their constant support. We also apologize for the delay in the UAE Corporate tax series as some promised commitments were required to be fulfilled by us in the due time.

This is the fourth part of the series in which we will discuss the Tax Consequences on persons operating in the Free trade zone in UAE.

To the definition given in Article 1 of the UAE Corporate Tax Law, the Free Zone Person means the juridical Person incorporated, established, or registered in the Free Zone including the branch office of the Non-resident registered in the UAE. As per the UAE Corporate tax law, the Free Zone Persons will be subject to "Zero Corporate tax" when they fulfill Certain Conditions.

1) Resident in the UAE: A Juridical Person who is incorporated in the Free Zones of the UAE or Established therein including when incorporated in the Mainland of the UAE but has operations in the Free zone and is registered with the UAE Authorities.

2) Non-Resident in the UAE: As per the state laws in UAE, a non-resident person can operate in the UAE Free Zone by having a wholly owned subsidiary or branch office/representative office in the Free Zone registered with the UAE Authorities.

For companies incorporated by Non-residents, the above will be covered by the First Limb (1), and for the branch offices of non-residents the above will be covered under the Second Limb (2)

Advise: It is advisable for Non-residents that might form a PE in UAE Free Zone in case where they undertake the Construction Project in the UAE Free trade Zones for more than 6 Months to have a branch office in UAE Free Zone registered with the UAE Authorities to claim exemption from Corporate tax if eligible.

Eligibility of Free Zone Person to Zero Corporate Tax

As per Article 18 of the UAE Corporate tax, a free zone person who fulfills the below Conditions will be taxed at Zero %

1. Maintains adequate substance in the State.
2. Derives Qualifying Income as specified in a decision issued by the Cabinet at the suggestion of the Minister.
3. Has not elected to be subject to Corporate Tax under Article 19 of this Decree-Law.
4. Complies with Articles 34 and 55 of this Decree-Law.(Article 34 Deals with Arm's Length Principle and Article 55 deals with Transfer Pricing Documentation).
5. Meets any other conditions as may be prescribed by the Minister.

Some Important Conditions from above all conditions:

1. Maintains Adequate Substance in the State: This condition might be as similar to the condition laid out in the "Economic Substance Regulation" (ESR) under which the UAE Companies have to satisfy the Economic Substance tests (ES Tests i.e. "Relevant Activity" and "Core Investment Generating Activity")

2. Qualifying Income: The UAE Corporate tax law is not clear about what will construe the "Qualifying Income" if we make reference of the UAE CT Public Consultation Document. In this document, it was outlined that the following types of Income earned by Free Trade Zone Persons will be subject to a Zero % Tax rate:

a) Income earned from transactions with businesses located outside UAE or income from trading with businesses in Free Zones.

b) Passive Income earned from the UAE Mainland like Interest, Royalty, Dividends, and Capital gains from the shares of Companies in the UAE Mainland.

c) Income earned from transactions with the UAE-Mainland group company. However, No expense will be allowed to UAE Mainland Company.

d) Income earned from the sale of goods from Designated Zones to buyers in the UAE Mainland where the buyer is the importer of record of those goods.

3. Transfer Pricing: As one of the Conditions to Qualify as a "Qualify Free Zone Person", the transfer pricing study in regard to transactions between its related parties must be at an arms-length price and proper transfer pricing documentation is to be maintained.

Election to pay tax by A Qualifying Free Zone Person:

A Qualifying Free Zone Person can make an election to be subject to Corporate Tax at the rate of 9%.

Now many of you wonder why this provision is in the tax law despite the fact that the Qualifying Free Zone Person has a Zero % tax rate. This provision is provided because a QFZP opting for a zero % tax rate can not be part of tax groups which means that the QFZP Entities can not transfer their losses to a tax group that will be assessed on a consolidated basis.

So, if a QFZP wants to transfer its losses it has to opt for paying corporate tax at 9% and for which a tax group can be made.

Thanks for reading it patiently. For any query or assistance in regard to the UAE Corporate tax, you can reach us at following

Email: [email protected]

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Contact No. +91- 79866-67336

+91- 83601-79845

Website: www.caaass.in