Trading companies in designated free zones, including exporters and importers, benefit most from the zero-percentage tax provision in the corporate tax irrespective of their dealings with mainland companies, according to the new guidelines issued by the UAE Federal Tax Authority.
This tax benefit for wholesale and high sea traders as well as importers and exporters will give a significant fillip to the UAE’s exports and manufacturing sectors, says Manu Palerichal, CEO and founding partner of Emirates Chartered Accountants Group.
As per the framework of UAE Corporate Tax rolled out in 2023, a 9.0 per cent taxation rate has been set for annual taxable income of above Dh 375,000 for all businesses. Qualifying free zone businesses can enjoy a zero-tax rate on qualifying income. However, to be eligible for this benefit, they must meet the relevant conditions set by the tax authorities. Any non-qualifying income of QFZPs is taxable at 9.0 per cent.
“While distribution businesses in all free zones will not get the zero percentage benefits meant for Qualifying Activities, companies doing distribution of goods or materials in the designated zone can claim the tax benefits, provided they satisfy certain conditions,” said Palerichal.
The guidelines have clarified the treatment of taxation of trading goods from designated free zones. “A trader importing goods in a designated free zone such as Jafza, Dafza, or Saif Zone imports goods from outside the UAE for selling to mainland customers can now avail zero percentage benefits provided such imports are made through any designated free zones” said.
“Many companies in the UAE do high-sea trading or third port shipment. It means they buy goods from country A, and distribute them in country B without the goods passing through the UAE ports. It has also been clarified that income from high-sea sales also will be eligible for zero-rated taxation,” says Purvi Mehta, Senior Tax Manager at Emirates Chartered Accountants Group.
“Another interesting clarification is on the export of goods. Even if the designated free zone company buys goods from the mainland and exports the same to customers outside the UAE, income from such sales will also be eligible for a zero rate. There is no condition that the goods have to pass through the designated free zones,” she said.
Tax experts said even the purchase of goods from the mainland and sales to another mainland customer by a designated free zone also will get zero tax benefits. “However, to avail of the zero percentage tax benefit, the trader should be a designated free zone company, and not in any other freezones such as DMCC or TECOM.”
According to the provisions of the law, the trader should ensure that the customer to whom the goods are sold is using the goods for resales or process and resales. In other words, the customer should not be the end user of the goods.
“If customers use the goods for their consumption, the supplier/trader will not be eligible for the zero-rated corporate tax”, says Ajil Varghese, Senior Tax Manager at Emirates Chartered Accountants Group.
To get the zero percentage tax benefits, the trader in the designated free zone should maintain adequate substance. This requires that the distribution activity has to be conducted in or from the designated free zone; FZP should have a sufficient number of qualified employees, and incur the business expenses within the designated free zone. That means the company should operate from the designated free zone and not the mainland. If a company does not operate from the designated free zone and fails to meet the substance and other additional conditions mentioned in the law in any particular year, it will lose eligibility for zero percentage tax benefits for the next four years even if it satisfies all conditions in the subsequent years.
“Hence it is a crucial year for every company to analyse the eligibility in the year 2024 itself and enjoy the benefits for the upcoming years by satisfying all required conditions, says Varghese.”