Starting a business in the free zone can be a relatively easy process as you dont require a local sponsor and are exempted from tax or is that really the case? As the UAE is expanding and constantly emerging with futuristic solutions the number of new businesses there continue to incline whether it is in the free zone or the mainland.
Until very recently companies in the Free zone were not subjected to paying taxes but as soon as june 2023 started the introduction of the corporate tax changed everything. So, you might be wondering how can that affect you especially if your company operates in the Free Zone, This article will clarify everything for you.
On June 1, the UAE implemented corporate tax, and a few eagerly anticipated free zone decisions were made public.
The first was a Cabinet choice, whereas the second was a ministerial.
It is critical to realize that these choices are components of an overall structure. They need to be understood in light of other information that has already been made public. Any components that are not expressly defined may be covered in a subsequent release, and many more are anticipated.
Finally, these judgments were made by various government agencies, including the Federal Tax Authority, the Finance Ministry, and the Cabinet.
Do we currently hold a firm position about free zones and corporate tax? No.
Here is what we’ve learned, along with some conclusions and queries you should think about.
The original guidance from 2022, which said that free zone firms would not be subject to corporate tax if no onshore transaction was performed, has been modified quite a bit.
These requirements come in the shape of activities. All items on the list that are not prohibited are regarded as qualified income. This implies that they are not subject to corporate tax.
On the other hand, the exempt operations will be subject to corporate tax. The list is not all-inclusive, which brings us to this practical VAT example.
Recognized frameworks can be helpful in influencing our ways of thinking.
For VAT conditions, a truck’s operating expenses (fuel) and secondary supporting costs (parts for repairs) are both zero percent in the logistic industry. The cost of tertiary care is standard-rated.
It can be challenging to draw a clear distinction between secondary and tertiary costs.
The consequence is that choosing a course of treatment could have an impact on the formal reported figures for money owed.
Although additional official announcements will offer clarification, bear the following things in mind.
Are you, as a company, planning to be cautious? Which side will you put a particular source of income in if there is any ambiguity on which side of the fence it belongs?
To be clear, as a member of a qualifying free zone, you must decide whether to enroll in corporation tax or not.
The maze of options will quickly vanish if you choose to pay 9% corporate tax on your taxable profits.
You can choose to opt out of corporate tax if you are a qualifying free zone person engaging in clear-cut non-excluded activity trading with another qualifying free zone person.
What happens if your client is not from a free zone yet the activity qualifies? Then the revenue is likewise taxable, and the corporate tax rate is zero percent.
Even if the activity is not qualifying but falls below the “de minimis” threshold, the revenue can still be considered qualifying income, and the corporate tax rate stays at zero percent.
Does this mean You can conduct some onshore business? Although it may seem so, there are restrictions.
The revenue cannot be over five percent of total revenue or have a value greater than Dh5 million. The tested number is the lesser of the two. Regarding a single reporting period, this.
Two extra factors are crucial in this situation.
An entity loses its qualifying free zone person status for the relevant tax year if the “de minimis” level is crossed. It also forfeits it for the subsequent four tax years.
The bigger concern is a post-reporting change in the way revenue is treated or a clarification that alters the nature of your revenue and leads to a failed “de minimis” test.
For those who must restate their stated tax computation, there will almost probably be procedures.
