Decoding UAE Corporate Tax for Free Zone Businesses: 0% Rate Insights

The UAE’s corporate tax public consultation for free zones (PCD) has offered valuable insights into the upcoming tax framework for these thriving hubs. However, a closer look at how financial and tax experts interpret these rules reveals a concerning gap in understanding, potentially leading to long-term consequences.

Processing vs. Distribution: Deciphering the Tax Code

The preferential 0% tax rate applies to income from the distribution of goods, but there’s a catch. This favorable rate is only valid if the distribution occurs in or from a designated zone. On the flip side, income from processing goods qualifies for the 0% tax rate as long as the business is based in any free zone.

Processing isn’t just about manufacturing; it involves the preparation, alteration, transformation, or conversion of goods for later commercial use or sale. Deciding what constitutes processing can be complex – is roasting coffee beans and selling them considered processing or distribution? What about packing ready-made jackets and trousers into sets? Even breaking down old goods into components – is that processing or distribution?

The term ‘preparation’ itself triggers varied interpretations. For free zone businesses pondering whether their distribution activities can be classified as processing, it’s crucial to consider the broader tax implications before making a final decision.

Manufacturing and Profit Splitting

Activities that qualify for the preferential 0% tax rate include manufacturing and processing. The PCD categorizes these activities into:

• Manufacturing of own goods
• Manufacturing on behalf of others

For the first category, the manufacturer’s income needs to be divided into manufacturing and sales profits. We’ve previously discussed how manufacturers in non-designated zones might encounter tax complexities.

While manufacturing profits enjoy a 0% tax rate across all free zone manufacturers, sales profits, akin to ‘distribution activity,’ qualify for the same rate only if the manufacturer operates in a designated zone. Dividing profits this way introduces practical challenges, adding another layer of complexity.

Untangling ‘Headquarters Services’ Tax Rate

Income from headquarters services provided to related parties also qualifies for the 0% tax rate. According to the public consultation, these services encompass managing, overseeing, and administering business activities of related parties. They include senior and general management, administrative tasks, risk management, procurement, and more.

Interpretations vary, leading some companies to contemplate relocating senior management and headquarters to free zones, regardless of designated zones. This allows businesses to attribute a portion of their corporate profits to these services, potentially reducing tax liabilities.

However, a careful reading of the consultation suggests that these activities should be offered as a comprehensive package. Offering individual services won’t qualify for the 0% tax rate. Moreover, shifting management without valid reasons might trigger anti-abuse provisions.

Navigating the Future: What Businesses Should Expect

Businesses should await further guidance and legislation stemming from the public consultation on free zone businesses taxation. It’s essential to ask the right questions and stay aligned with the right trajectory for your business.

Need assistance with business setup services in UAE? Reach out to us at info@skwergroup.com. We’re here to help you navigate the intricacies of UAE corporate tax and ensure your business thrives in the dynamic landscape.