UAE clarification of Freezone Qualifying Income

[yoyodubai]

I also think it's entirely possible they simple haven't decided that part yet - so they released ambiguous guidance on purpose to test the waters and postpone the decision on foreign income...

Yeah, I get it.

But the ambiguity makes it difficult to plan ahead.

It seems being treated like a mainland company and receiving small business relief might be the most interesting path (at least for me) especially since I don't plan on being in the UAE long-term so the future consequences of making the shift aren't important.

Planning on receiving more guidance from qualified professionals but the ones I've reached out to have not been able to provide much certainty as they're also looking for clarification.

 

[sergeylim88]

where does it say that you will become mainland company if you use the small business relief?
freezone companies can use it, if they are not qualifying person (at least in my understanding, i wrote about this few pages back)

i didn't find anything in official documents that says if you use this one year you can't be a qualifying freezone person next year. being qualifying freezone person depends on type of your income and few other things, and small business relief is not mentioned anywhere

 

[SasuT]

Sorry guys, after 20 pages I’m still not sure of a clear answer. I guess nobody really knows for now, right?

Let’s take an example that represents a lot of businesses here.

Digital Marketing Agency.
Based in a Dubai Freezone.
Makes 400k-500k a year profit.
Works with clients in Europe (B2B/B2C) fully online.

This example of company will now have to pay the 9% tax or no ?

 

[JustAnotherNomad]

I guess nobody really knows for now, right?

Nobody really knows because the tax will only kick in in 2024 for most people, first returns will be due in september 2025.
That's when we will really know how they handle this.

All official documents published so far can only be interpreted as meaning you have to pay the 9% - because your example simply wouldn't fit the strict 0% criteria.
However, it's of course theoretically possible that they will later say that the documents published only apply if you have UAE clients. But there is nothing like that mentioned in the documents.

If they want to continue to offer 0%, then I'm sure we will hear about it. If we don't hear anything, I would expect the 9%.
With 400-500k in profits, you may be able to stay tax free by paying a high salary, using small business relief, etc.
Check Fred's blog article.

 

[JustAnotherNomad]

Btw, you can get a binding clarification here:

Tax Clarifications Request

- Federal Tax Authority - Tax Clarifications Request

tax.gov.ae

But it seems like the service isn't available for corporate tax yet.

 

[Au999]

Article in The National yesterday specifically on freezones pretty much said anything not on excluded list with no mainland activities is 0%. It also said the official 0% list of activities is not exhaustive (can say THAT again) and more official clarification and ministerial edicts will follow.

Knowing The National isn't in a hurry to step on any toes it seems to give more weight to 2022 decisions read in conjunction with the new excluded list - as opposed to saying everything apart from shipbuilders and random heavy industry is taxed.

Sure read to me that way.

UAE corporate tax and free zone companies: What you need to know

An entity that freely chooses to opt out of the free zone exemption for the tax cannot opt back in at a future time

www.thenationalnews.com

 

[Fred]

Article in The National yesterday specifically on freezones pretty much said anything not on excluded list with no mainland activities is 0%. It also said the official 0% list of activities is not exhaustive (can say THAT again) and more official clarification and ministerial edicts will follow.

Knowing The National isn't in a hurry to step on any toes it seems to give more weight to 2022 decisions read in conjunction with the new excluded list - as opposed to saying everything apart from shipbuilders and random heavy industry is taxed.

Sure read to me that way.

UAE corporate tax and free zone companies: What you need to know

An entity that freely chooses to opt out of the free zone exemption for the tax cannot opt back in at a future time

www.thenationalnews.com

That's to be very honest the redline for almost every tax professional we spoke to and what we released on our Blog Article as well.

We are very sure we get soon further clarifications if a Public Newspaper is pointing already in this direction.

 

[algotrader]

Article in The National yesterday specifically on freezones pretty much said anything not on excluded list with no mainland activities is 0%.

Not sure where you read that. The article says the following:

If you are a qualifying free zone person trading with another qualifying free zone person in a clearly defined non-excluded activity, then you can elect to opt out of corporate tax.What happens if your customer is a non-free zone person but the activity is a qualifying activity? Then the revenue is also qualifying revenue and corporate tax is zero per cent.
Staying with a customer who is a non-free zone person, this is where it gets interesting.
Should the activity be non-qualifying, but below a “de minimis” level, that revenue can still be qualifying income and corporate tax remains at zero per cent.

It says that in order to opt out of corp tax you have to do either business with other FZ person or have "qualifying revenue" from non-FZ person (which means both inside or outside UAE) and that is not excluded activity (like manufacturing or shipping). If the revenue is non-qualifying it has to be below de minimis treshold to benefit from 0% CIT. This is in line with what was said in the Deloitte presentation and PWC:

Cabinet & Ministerial Decisions Release: Corporate Tax Rules for Free Zones

The highly anticipated Decisions on the Corporate Tax Rules for Free Zones have recently been released. Cabinet Decision No 55 of 2023 was issued on 30 May 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the...

www.pwc.com

Nowhere it says that income from outside UAE is treated differently than income from a "non-FZ-person".

 

[Au999]

Not sure where you read that. The article says the following:

It says that in order to opt out of corp tax you have to do either business with other FZ person or have "qualifying revenue" from non-FZ person (which means both inside or outside UAE) and that is not excluded activity (like manufacturing or shipping). If the revenue is non-qualifying it has to be below de minimis treshold to benefit from 0% CIT. This is in line with what was said in the Deloitte presentation and PWC:

Cabinet & Ministerial Decisions Release: Corporate Tax Rules for Free Zones

The highly anticipated Decisions on the Corporate Tax Rules for Free Zones have recently been released. Cabinet Decision No 55 of 2023 was issued on 30 May 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. 47 of 2022 on the...

www.pwc.com

Nowhere it says that income from outside UAE is treated differently than income from a "non-FZ-person".

It says:

"Here is what we have learnt, alongside some implications and questions you should be considering.

The original guidance from 2022 – that said zero per cent corporate tax would apply to free zone entities if no onshore trading was conducted – has been qualified quite extensively.

These qualifications are in the form of activities. Those on the list that are not excluded are considered qualifying income. This means that no corporate tax is payable on them."

Key is that activities that are NOT excluded are 0% It then goes on to say the qualified list is not exhaustive and will be expanded upon shortly.

Sure you can say it's referring to a list of qualified activities when it says those on the list that are not on the excluded list, but there is zero overlap between the two official narrow lists of qualified and excluded activities, so why make a point of saying that - if the list in question isn't ALL non excluded activities.

At least that's my take, just a take by a regular guy looking at the whole picture - and like Fred and other providers are saying, wait and see - more is coming.

So I wait.

 

[gatrader]

Guys and how about if the UBO of the company and only shareholder has residency in another country (no substance) or has residency card but no rented apartment (so activity is done outside UAE)?

 

[JackAlabama]

Guys and how about if the UBO of the company and only shareholder has residency in another country (no substance) or has residency card but no rented apartment (so activity is done outside UAE)?

Do you have exec stuff in UAE or workers?

 

[Fred]

Key is that activities that are NOT excluded are 0% It then goes on to say the qualified list is not exhaustive and will be expanded upon shortly.

That's not only your take but literally the take of every tax professional we spoke to and based on we designed our DLS Dubai Statement.

Now if that's already published in a news paper you know what's coming next- Federal Tax Authorities Clarifications.

 

[gatrader]

Do you have exec stuff in UAE or workers?

Not really, but what if the only shareholder has Dubai residency (not living tough)?

 

[troubled soul]

 

[OffshorePhantom]

What a mess UAE is doing. They made some clarifications but in the end, even with those clarifications, there are still interpretations and speculations on what would be taxed and what not.

UAE used to be a straightforward place for business where there were very few laws and they were very clear, now it is no more the case.

Also, the fact that with Freezones they promised 50 years of tax-free status and now they are doing this tells a lot about what could change in the next few years, maybe personal income tax, property tax etc? Who knows.

 

[JustAnotherNomad]

We received a reply from the Federal Tax Office, which simply referred us to read the law and regulations without commenting on foreign income.

Typical UAE.

 

[manukahoney]

Typical UAE.

Well, I once asked the UK gov body about some tax uncertainty - their answer was exactly the same, "please read this regulation". Unless you have someone who can open the doors and talk to them face to face - all the "talk to us" services are a joke.

 

[OffshorePhantom]

Well, I once asked the UK gov body about some tax uncertainty - their answer was exactly the same, "please read this regulation". Unless you have someone who can open the doors and talk to them face to face - all the "talk to us" services are a joke.

The fact is that the real selling point of UAE was that it is business friendly and law simple and very clear. Now, although 9% CIT is not that high, UAE is transforming and it is no more the same business heaven it was before.

 

[Fred]

Just giving you a "behind the scenes" update on todays high level FTA Meeting with leading Tax & Legal Firms:

We are Happy to confirm one more time that 99% of DLS Dubai Clients remain 0% Corporate Tax and 100% of DLS Dubai Clients are based in Designated Zone.

Congratulations!

 

[luap]

Just giving you a "behind the scenes" update on todays high level FTA Meeting with leading Tax & Legal Firms:

This makes sense regarding B2B transactions, ie buying a pallet of goods from China and reselling them to an Indian business. One issue is that many are selling via Shopify/Amazon/Own website, and these are mostly to individuals, which are specifically excluded (as the law stands today). If they sell to an "Indian business" first, then that Indian business will be liable for corporate tax in India (which could then fall under UAE CFC/PE etc rules).

Excluded are:
"any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) of the above section;", which are:

d. ownership, management and operation of ships;
f. fund management services that are subject to the regulatory oversight of the competent authority in the UAE;
g. wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE;
j. financing and leasing of aircraft, including engines and rotable components;


If the above Linkedin post is clearly stated by the ministry, it could be interesting for those selling directly to businesses, ie from China to India or US companies, or even better they may come out and state it includes selling to individuals too. I would say that for anybody who is on the fence regarding the UAE, it's probably best to wait a few months and see.