The stakes are high for trading companies operating out of free zones. Under the UAE rules, such businesses must operate from ‘designated zones’ to avail of the 0 per cent rate.
“While the preferential 0 per cent tax rate is generally aimed at all free zone entities, those engaged in distribution of goods can do so only in or from a designated zone,” said Pankaj S. Jain, Managing Director at AskPankaj Tax Advisors. “Certain free zones in the UAE have already been recognized as ‘designated zones’ under the VAT laws, based on criteria such as supervised movement of goods and people, etc.”
- Maintaining adequate substance. (This is essentially about a business having a certain number of employees who carry out income-generating activities from their licensed base.)
- Detailed documentation on the financials.
- Monitoring compliance with the ‘de-minimis’ threshold. (Where a business must show that the non-qualifying revenue has not exceeded the lower of these amounts: Dh5 million or 5 per cent of its total revenue for that year.
Only sell through a reseller – and do KYC
Another key eligibility criteria for trading companies in designated zones is that they can sell goods only through a reseller. “And that reseller must not the end user of these goods, but intends to sell them further,” said Ali Nawaz Abbasi, Senior Client Accounting Manager, Sovereign Corporate Services.
“Businesses need to carry out proper KYC (know your customer) to satisfy this requirement.”
Be sure about compliance
The FTA in all its communications has been insistent on one point – at every step, businesses need to check where they stand on the tax compliance rules.
If a company wants to avail 0% tax regime, then trade and distribution can only be done via a designated zone, not any free zone.
“Companies must ensure they meet the de-minimis requirements to maintain these benefits. Additionally, proper KYC is vital to ensure compliance, particularly for distribution companies verifying that the buyer is not the end-user.”
A proper KYC is vital to ensure compliance, particularly for distribution companies verifying that the buyer is not the end-user
“If other business operations are not covered under ‘qualifying activities’, that company may consider segregating the trading activity to protect itself from de-minimis threshold,” said Pankaj S. Jain. “However, the impact of anti-abuse rules needs to be examined carefully.”
Check out tax status ASAP
What these businesses must not do is put off consulting the tax authority and the respective free zones about their corporate tax status.
“The corporate tax rules and ‘tax holidays’ will vary in different free zones,” said Abbasi. “It is important to get guidance specifically for your business.
“The lines between business conducted on the mainland and a free zone have been blurred. Therefore, the ‘qualifying income’ for 0 per cent tax has been confusing for businesses to navigate.
“There has been overlapping business between the two jurisdictions before the introduction of UAE corporate tax – and now businesses are having a harder understanding of their requirements.”
