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The United Arab Emirates (UAE) has recently bolstered its corporate tax framework with the issuance of two pivotal guidelines by the Federal Tax Authority (FTA). These guidelines are designed to provide clarity and enhance strategic decision-making for businesses operating within the UAE, particularly focusing on entities within Free Zones.
Firstly, the guideline concerning Free Zone Persons clarifies that the designation of "Free Zone Person" extends to the entire legal entity and not merely specific branches. This means that companies headquartered outside Free Zones can establish branches within Free Zones and benefit from a 0% corporate tax rate on Qualifying Income generated through these branches.
Secondly, the guidelines emphasize the application of the "arm's length principle" in transactions involving Free Zone Persons and their related parties, including branches both within and outside the UAE. This principle ensures that transactions are conducted at fair market prices, thereby preventing artificial profit shifting for tax purposes. The guidelines advocate for the adoption of internationally recognized profit attribution methods, such as the "separate entity approach," which considers functions performed, assets utilized, and risks assumed by each entity.
A noteworthy aspect highlighted by the guidelines is the eligibility for the 0% tax rate even before revenue generation from Qualifying Activities commences. This provision supports entities during the initial phases of setting up operations within Free Zones, allowing them to benefit from tax incentives as they establish their business presence and commence operations.
Expense allocation between Qualifying Income and non-Qualifying Income is another critical area addressed by the guidelines. Free Zone Persons generating both types of income must allocate expenses using the arm's length principle to accurately determine the taxable portion. This ensures that only income qualifying for the 0% tax rate benefits from the associated tax incentive.
Furthermore, the guidelines elaborate on Qualifying Activities, explicitly stating that facilitating international trade by importing goods from one country and exporting them to another without entering the UAE qualifies as a Qualifying Activity. This provision supports businesses engaged in global commerce, enabling them to benefit from the 0% tax rate on profits derived from such transactions.
In summary, by delineating clear criteria for qualifying for the 0% tax rate, outlining guidelines for fair profit attribution, and specifying rules for expense allocation and high-sea sales, the FTA aims to create an environment conducive to business growth and investment.
In tandem with these developments, the FTA issued Decision No. 3 of 2024, stipulating mandatory corporate tax registration effective from March 1st, 2024. Resident juridical persons incorporated before this date must register by specific deadlines ranging from May 31st, 2024, to December 31st, 2024, based on their original license issuance month. Those incorporated after March 1st, 2024, must register within three months of incorporation or by the end of their financial year if managed from abroad. Non-resident persons with a Permanent Establishment (PE) or nexus in the UAE, both before and after March 1st, 2024, have distinct registration deadlines. Non-compliance with these timelines will result in an administrative penalty of AED 10,000.
Reference/ Citation
1. Free Zone Persons - Corporate Tax Guide | CTGFZP1
2. The Timeline specified for Registration of Taxable Persons for Corporate Tax for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses and its amendments Federal Tax Authority Decision No. 3 of 2024 – Issued 26 February 2024 (Effective1 March 2024)
