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UAE Corporate Tax law to benefit Free Zone-based Companies
Dubai May 5, 2022:
Since the announcement of UAE’s nine percent corporate income tax (CIT) from June 2023, a widely discussed topic has been the taxability of free zone entities. The great news is that Corporate Tax will continue to benefit free zone-based entities with a host of incentives.
The UAE Ministry of Finance (MoF) issued a public consultation document inviting comments from stakeholders on the proposed legislation. This progressive step provides an opportunity for businesses to play a key role in formulating the UAE Corporate Tax law. The consultation document outlines the following points:
- The UAE Corporate Tax regime will honour the tax incentives currently being offered.
- Zero percent CIT rate will be applicable if the free zones entity earns income from outside UAE or within free zones.
- Audited financial statements are a must.
- Mainland branches of free zone entities will be taxed at the regular tax rate on mainland income.
- Free zone entities with passive income such as dividend, royalty and interest from the mainland will attract a zero percent tax rate. Similarly, such entities in designated zones for VAT purposes supplying goods to the mainland will also be eligible for zero percent rate.
- Free zone entities can be a regional sourcing hub; however payments made by mainland entities will not be a deductible expenditure.
- Any other mainland sourced income to the free zone will disqualify it from the zero percent rate.
- Free zone entities can make an irrevocable decision to be subject to the regular corporate tax rate.
- For computing taxable income, accounting profit/loss would be the starting point. The default tax year would be the Gregorian calendar year. Dividends and capital gains would be exempt subject to certain conditions. Expenses on account of interest payments have been limited to 30 per cent of EBITDA and only 50 per cent of entertainment expenses would be allowed as deduction.