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How Free Zone Companies Can Maintain Tax Benefits While Expanding to the Mainland?
Dubai’s free zones have long been an attractive destination for businesses due to their tax incentives and ease of operations. However, as companies grow, many consider expanding into the mainland to access a broader market and unlock new opportunities. While this expansion offers significant growth potential, it also comes with corporate tax implications that businesses must carefully navigate. Understanding the UAE’s corporate tax framework is essential to ensure compliance, optimize tax benefits, and maintain a competitive edge. In this guide, we explore the tax obligations of free zone companies, how their tax status changes when operating in the mainland, and key strategies to minimize tax liabilities while expanding.
Understanding Corporate Tax Rates
As of June 2023, the UAE implemented a federal corporate tax regime:
- Mainland Companies: Subject to a standard 9% corporate tax on taxable income
exceeding AED 375,000. - Free Zone Companies: Eligible for a 0% tax rate on qualifying income, provided
they meet specific conditions. Non-qualifying income is taxed at 9%.
Qualifying Free Zone Person (QFZP) Criteria
- To benefit from the 0% tax rate, a free zone company must:
1. Maintain Adequate Substance: Have sufficient staff, premises, and operations within the free zone.
2. Derive Qualifying Income: Engage in activities like manufacturing, processing, holding intellectual property, or logistics services within the free zone.
3. Comply with Transfer Pricing Regulations: Ensure transactions with related parties are at arm’s length.
4. Meet De Minimis Requirements: Limit non-qualifying revenue to 5% of total revenue or AED 5 million, whichever is lower.
Impact of Mainland Expansion on Tax Status
Establishing a branch or office on the mainland can affect a free zone company’s tax benefits:
- Qualifying Income: Income from qualifying activities within the free zone remains taxed at 0%.
- Non-Qualifying Income: Income from mainland activities is subject to the standard 9% corporate tax.
Compliance Obligations
Both free zone and mainland companies must:
- Register for Corporate Tax: All entities are required to register, even if they qualify for the 0% tax rate.
- File Annual Tax Returns: Submit returns detailing income and tax liabilities.
- Adhere to Transfer Pricing Rules: Ensure all related-party transactions comply with arm’s length standards.
Strategic Considerations
Before expanding to the mainland, free zone companies should:
- Assess Business Activities: Determine which operations qualify for the 0% tax rate and which will be taxed at 9%.
- Evaluate Structural Options: Consider maintaining separate entities for free zone and mainland operations to optimize tax benefits.
- Consult Tax Professionals: Seek guidance to navigate the complexities of the UAE’s corporate tax landscape effectively.
By thoroughly understanding these tax implications, free zone companies can strategically plan their mainland expansion while optimizing their tax position.
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