As the UAE’s new corporate tax regime comes into effect ICAEW has urged free zone companies to understand how the changes will affect them. To help, ICAEW held a Q&A session with Joe Pacelli, Head of Tax at KPMG. Pacelli explained how the new tax rules impact UAE businesses, especially those operating in free zones, and urged them to closely monitor the evolving regulations since their tax policies differ from mainland onshore companies. 

 

The new corporate tax rate of 9%, effective either in June or January 2024 depending on the financial year, aligns with the broader OECD Pillar Two framework, which includes a global minimum corporate tax requirement of 15% for large multinationals. The UAE government has unveiled a comprehensive corporate tax policy, encompassing both mainland and free zone regulations, to foster a fair and transparent business environment.

 

Free zone companies, which enjoy unique tax policies and various appealing advantages, are being encouraged to take note of the changes. While the UAE has decided to honour the tax holidays for free zone companies, not all of the 40+ free zones in the UAE qualify for this exemption. 

 

Tax holiday

Certain activities, like manufacturing of goods and services, processing of materials, and ownership and management of operations and shipping, fall within the tax holiday category. However, activities like banking, insurance, finance and leasing, ownership and exploitation of oil rights, will still be taxed at 9%. 

 

The discussion clarified that the tax holiday does not imply zero tax, rather a corporate tax rate set to 0%, with the possibility of future incremental adjustments. However, it’s believed that any increase in the free zone tax rate is unlikely given these tax holidays serve as an incentive to encourage business growth. Despite the 0% corporate tax rate, free zone companies are still required to maintain adequate bookkeeping to ensure compliance with transfer pricing regulations. 

 

Hanadi Khalife, Head of Middle East, ICAEW, said: "While the levy on corporations is reshaping business operations from a legal and accounting standpoint, the measured introduction of the policy suggests those leading its implementation are committed to creating a mutually beneficial business landscape. Introducing these regulations is necessary to create a fair and transparent business environment and prevent exploitation through tax planning strategies.

 

“Companies have the option to create tax groups, treating subsidiary businesses as one taxable entity. However, the UAE government emphasises the need for regional businesses with limited experience in corporate tax regimes to maintain standard accounting practices to ensure compliance.”--TradeArabia News Service