Foreign Investors In UAE FTZ Must Pay Attention To Upcoming Tax Regulatory Changes

Special attention will be paid by the UAE tax authorities to the new ‘anti-abuse rules’

Foreign investors in the UAE, and especially those operating out of Free Trade Zones or with a base on the UAE ‘mainland’ may need to think about potential tax restructures to their businesses in order to properly absorb the upcoming Corporate Income Tax (CIT).  The new UAE Corporate Tax comes into effect on June 1, 2023.

Any changes to the business must stay in compliance of the incoming ‘anti-abuse rules’ that form part of the UAE corporate tax regulations. The general anti-abuse rules need to be suitably factored into any proposed changes to mitigate against tax increases.

Anti-Abuse Rules

The anti-abuse rules are clear – businesses in the UAE cannot make changes solely to gain a tax advantage and thus hope to pay less on their annual income.

There have been discussions by UAE businesses registered in the UAE Free Trade Zones that suggest the possibility of dividing up their company divisions into separate subsidiaries to reduce the overall revenue income and thus avoid a higher rate of CIT. Businesses are tax exempt if revenues are less than Dh375,000 (slightly more than US$100,000).  This is especially alluring for businesses operating separate licenses for their free zone and mainland operations.

But this could be disallowed under anti-abuse laws if any move to restructure the company was deemed purely as a tax evasion measure and of no actual benefit to the company. This means that adhering to the new tax laws takes preference. Fines can be imposed upon companies ‘trying it on.’

The general government opinion is that FTZ represent one of the more significant contributors to the UAE GDP, and the UAE CT rules gives businesses in these zones ample flexibility without them needing more in order to operate profitably.

Qualifying Income & Transfer Pricing

Under these rules, pure-play free zone businesses/their owners are exempt from the 9% tax due based on their ‘qualifying income’. This is to be confirmed by a UAE Cabinet decision that is expected shortly.

The UAE federal decree stipulated that free zone ‘persons’ could benefit by incurring a zero % corporate tax only on the ‘qualifying income’, which is still to be defined. Based on available guidance from the UAE Ministry of Finance, the qualifying income should include offshore as well as onshore sources of income of free zone persons; but be subject to strict conditions.

This means there should be detailed guidance forthcoming on this aspect. When the decision comes on qualifying income, tax specialists hope it will also address outstanding Transfer Pricing issues, which is relevant as entities restructure to have standalone operations between free zone and mainland enterprises.

To be treated as a ‘Qualifying Free Zone Person’ – and thus eligible for 0% CT, the free zone entity must:

Maintain adequate ‘substance’ – meaning business interests in the UAE;

Derive ‘qualifying income’ as specified in the upcoming UAE Cabinet decision;

Comply with ‘transfer pricing’ rules and maintain the relevant transfer pricing documentation; and

Not have made an election to be subject to UAE corporate tax regime in full.

Incentives For Free Trade Zone Businesses

The ‘Free Trade Zone Legal Person’ incentive is a substantial tax break for eligible businesses. Apart from businesses engaged in extracting natural resources, government and government-controlled entities also enjoy exemptions under the Federal Decree Law subject to eligibility criteria and conditions.

In addition, the Federal Decree Law contains relief for small businesses ‘where a resident taxable person generating revenue up to a threshold’ – to be decided by the UAE Minister of Finance – may elect to be regarded as not having derived any taxable income for the relevant tax period. Accordingly, there will not be any tax cost for these small businesses.

These new, substantive legislations require businesses to fully recognise their upcoming tax applicability and plan for efficient change management. Businesses in the UAE should consider undertaking a deep review and documentation of revenue operations, assessing the impact of corporate tax, and complete requisite changes well in time of June 1^st.

Related Reading

• Dubai And UAE Foreign Investors Must Prepare For New Tax Rules Effective June 1st/a>
• Updates on the UAE’s New 9% Corporate Income Tax Charges and Applicability/a>

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