How to file a corporate tax claim on free zone companies – News

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Each free zone has its own framework. Based on these frameworks, the income of persons in the free zone will not be subject to corporate tax for a specified period.



The CT Scheme will honor tax incentives offered to Free Zone Persons subject to Free Zone Persons maintaining adequate substance and complying with all regulatory requirements. — File photo

By Mahar Afzal/Compliance Corner

Published: Sun, Jun 5, 2022, 4:46 PM

Free zones are a crucial part of the economy of the United Arab Emirates and play a key role in attracting foreign investment which plays a central role in the development of the country. Given the importance of free zones, special rules have been proposed in the public consultation document on corporation tax (IS) for companies registered in free zones (hereinafter referred to as “free zone persons”). “).

Each free zone has its own framework. Based on these frameworks, the income of persons in the free zone will not be subject to corporate tax for a specified period. According to the consultation document, the CT scheme will honor tax incentives offered to free zone persons subject to free zone persons maintaining adequate substance and complying with all regulatory requirements.

To understand the proposed application of TC on persons in the free zone, we have considered all possible options and classified the transactions into the following four categories.

Income from companies in the rest of the world

It was proposed in the consultation paper that income from transactions with companies located outside the UAE would be subject to a zero percent corporate tax. The consultation paper is silent on income from transactions with individuals outside the UAE, which we believe will be subject to the same zero percent corporate tax.

Income from companies in the same free zone

The consultation document points out that income derived from trade with companies located in the same free zones will be subject to a zero percent corporate tax. The document says nothing about income from transactions with individuals located in the same free zones, which we believe will be subject to the same zero percent corporate tax, but we will have to wait for the law for more details to this subject.

If the Free Zone Person is located in the designated area for Value Added Tax (VAT) purposes and sells goods to the Mainland INCO Futures Person when delivery of the goods is made in the designated area and the mainland clears the goods in its own import code, the person still designated area can enjoy zero percent corporate tax.

Income of persons in other free zones

The consultation paper is clear on the proposal to apply corporate tax to income earned by people located in other free zones, and such transactions will be subject to a zero percent corporate tax.

Incomes of people on the mainland

People in the free zone can have transactions with people located in the mainland of the UAE. It is clearly stated in the consultation document that if the Mainland Entity and the Free Zone Person are part of the same CT Group, then the income earned by the Free Zone Persons will be subject to zero corporate tax. percent. However, to ensure the TC neutrality of these transactions, payments made to the Free Zone Person by a Mainland Group Company will not be an allowable expense in calculating Group Taxable Profits.

If the mainland company and the free zone person are not part of the same CT group, then the legal structure of the free zone person is essential. For example, if the FTZ person has a branch on the mainland, then the FTZ person’s income will be taxed at the normal CT rate on their mainland source income, while continuing to benefit from the zero rate. percent of TC on his other income. Income. However, if the person in the free zone does not have a branch on the mainland, he can continue to benefit from the zero percent rate of CIT on his passive income from persons in the free zone. Passive income would include interest and royalties, dividends and capital gains from owning shares in mainland UAE companies.

Where a person living in a free zone receives income from mainland persons who are subject to a zero percent CT rate, that income would be subject to a zero percent withholding tax.

Mahar Afzal is Managing Partner at Kress Cooper Management Consultants. The above is not an official opinion but a personal opinion of the author. For any questions/clarifications, please write to him at [email protected]

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