Freezone Taxation

Freezone Companies In The Uae And Taxation

The UAE is known to be a tax-free country for its tourists and investors. However, in recent times, things have changed slightly and it is believed that in the near future, more amendments will be effected to the various laws establishing the tax-free climate of the Country.

One of the most important reasons foreign investors choose to set up companies in the UAE is the country’s taxation system which provides mainly for the taxation of companies operating in the oil and financial industries. It must also be noted that each Emirate has its own tax laws which governs itself and has different taxation systems.

For the purpose of this article, we shall be focusing on Dubai and Umm al Quwain Emirate.

  1. CORPORATE TAX

Each Free zone in Dubai has its own authority which issues and enforces the applicable legislation, including tax decrees. A company is considered tax resident in a Dubai free zone once it is incorporated with the relevant authority and if the management of the company is exercised in Dubai.

Generally, free zone authorities in Dubai do not impose a corporate tax, companies are not required to pay this tax in the Emirate or to follow other procedures related to taxation; therefore, companies are not required to file annual tax returns and there are no taxable periods or tax assessments imposed on Free zone companies in Dubai.

Usually, Dubai free zone authorities offer tax exemptions for up to 50 years to foreign companies operating in the UAE but not to locally incorporated companies. However, foreign shareholders of Dubai free zone companies must pay attention to the taxes they are subject to in their home country and if any double tax treaty applies in their case. Only companies operating in the banking sector or in the oil and gas field in Dubai are subject to the corporate tax. These are the only businesses for which such kind of tax is imposed.

VALUE ADDED TAX (VAT)

Value-Added Tax (VAT) is the most common form of taxation in the world. Businesses which have a minimum turnover of AED 375,000 are liable to pay VAT on both their supplies and imports In the United Arab Emirates.

  1. The VAT Regulations for Free Zones

There are nearly 45 free zones in UAE which extend several incentives and privileges to the businesses registered within its boundaries. The regulations state that only those UAE free zones which have fenced areas, proper security measures and have customs controls in place to monitor the entry and exit of individuals and movement of goods, shall be treated as designated zones. All transactions by companies inside designated zones, including importing, storing, and selling goods to countries outside the UAE, will be exempted from UAE’s VAT law.

  1. The Impact of VAT on UAE companies

Apart from the 20 designated freezones zones – all other free zone companies are liable to pay VAT. These designated zones can be of multiple types.

  1. The entire free zone is a Designated Zone and so all products inside will be without VAT. These types of zones will mostly be located near ports as they will hold products that are imported but then get exported directly affecting the UAE economy.
  2. Specific Areas within the Free Zone but not all of the Free Zone. Free Zones that produce goods are most likely to fall under this. Companies will need to store goods for the local market in designated warehouses after going through customs clearance.
  3. Firms in service-related Free Zones will not be subject to any VAT as they are not liable to produce any goods.

CONCLUSION

From the preceding, Corporate Income tax (taxable profits) is not applicable to the profits of Freezone companies. Nevertheless, since the regulations of a country are volatile in nature and subject to change, any organisation willing to rely on this opinion should continue to stay abreast of regulatory reforms in the UAE from time to time.

For any free consultation in this regard, feel free to contact US.

 

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