UAE clarification of Freezone Qualifying Income

[troubled soul]

First , People let Responses this form with "make freezone tax free again"..... kindly submit your response may this change the mind of Ruler ...
https://mof.gov.ae/free-zone-public-consultation/
Secondly May be very Good News for E-commerce and Dropshipping will be considered Qualifying Income.
If I understand correctly....

Contract / toll manufacturing
In the case of contract manufacturing, a Free Zone Person (Manufacturing Co) enters into a contract with a person under which Manufacturing Co manufactures products for and on behalf of that person. In addition to the manufacturing of the product, Manufacturing Co also procures all necessary raw materials.

Irrespective of whether the contractor is based in a free zone, in the mainland UAE or in a foreign country, the compensation Manufacturing Co receives for the manufacturing service provided and the supply and usage of raw materials used in the manufacturing process to the contractor would be considered Qualifying Income.

Although toll manufacturing and contract manufacturing are similar modes of production, in the case of toll manufacturing, the contractor would typically supply Manufacturing Co with the necessary raw materials, designs and production specifications. The income earned by a toll manufacturer based in a free zone would also be considered Qualifying Income.
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Can anybody can confirm that this paragraph is for E-commerce and Dropshipping ?

(1) Distribution of goods or materials outside of the UAE ”“ Designated Free Zone Person (Distributor Co) buys goods from a manufacturer in Country A, and sells these goods to a retailer in Country B. Distributor Co earns a profit / margin on the goods sold to the retailer in Country B. The goods are shipped directly from the Manufacturer in Country A to the Retailer in Country B.

(2) Distribution of goods or materials in the UAE ”“ TheDesignated Free Zone Person (Distributor Co) buys goods from Country A, andsells these goods to a retailer in the UAE. Distributor Co earns a profit /margin on the goods sold to the retailer. The goods are shipped by theManufacturer in Country A to Distributor Co in the Designated Zone from wherethey are imported into the UAE.
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Seems , 99% of @Fred customers really do not need to pay tax.....

Sorry in advance If I mention something wrong......as my understanding of English and corporate law are limited...
Thanks

 

[JustAnotherNomad]

B2C is explicitly an excluded activity, so it is taxed. So no dropshipping.
I also don't see how manufacturing of physical goods is relevant for 99% of Fred's clients, but maybe I'm missing something here.

 

[alessio]

JustAnotherNomad said:
B2C is explicitly an excluded activity, so it is taxed. So no dropshipping.
I also don't see how manufacturing of physical goods is relevant for 99% of Fred's clients, but maybe I'm missing something here.
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Agree

 

[sergeylim88]

for nominee director you can use services based in Seychelles for example
a lot of nominee directors come from there
can someone confirm this will not cause pe/cfc issues in Seychelles? in my understanding it will not

 

[Cristero]

Sorry to hijack a little this thread, but this seems to be the most active thread on the current situation in the UAE. As many of you, I'm trying to understand if it's still worth it to keep an entity in a free zone or not. And in my case it's not a matter of CIT (since I don't go above 3M AED revenue, neither 375k AED profits), rather accounting and audit costs. The accountants obviously are trying to get advantage of the situation and all says that audit is mandatory, but on the government FAQ page it seems that audits for free zone entities are mandatory only for whoever wants to benefit from the 0% CIT.
Does anyone know if that applies to the other businesses as well?
Audit and accounting costs make a big difference for small businesses.

 

[madihrb]

Cristero said:
Sorry to hijack a little this thread, but this seems to be the most active thread on the current situation in the UAE. As many of you, I'm trying to understand if it's still worth it to keep an entity in a free zone or not. And in my case it's not a matter of CIT (since I don't go above 3M AED revenue, neither 375k AED profits), rather accounting and audit costs. The accountants obviously are trying to get advantage of the situation and all says that audit is mandatory, but on the government FAQ page it seems that audits for free zone entities are mandatory only for whoever wants to benefit from the 0% CIT.
Does anyone know if that applies to the other businesses as well?
Audit and accounting costs make a big difference for small businesses.
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Many of accountants are not updated here and it seems from my past experience and current situation they dont know much about their own field. Things are evolving here on daily basis, from latest scenario if your freezone business does not qualify for 50 years corporate tax exempt than your tax returns will be filed as mainland company which means no audit required but you have to do the bookkeeping. For bookkeeping you can hire freelancers which will do the job at lower rates.

If your business is filled as mainland then you can opt for small business relief if you revenue is less than 3 million aed.

 

[Cristero]

Thanks for the response @madihrb. So no audit for now for a company that is not a qualifying free zone entity. The small business relief means I don't pay CIT mainly, doesn't it?

 

[madihrb]

Cristero said:
Thanks for the response @madihrb. So no audit for now for a company that is not a qualifying free zone entity. The small business relief means I don't pay CIT mainly, doesn't it?
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From current scenario you will just file return and avoid CIT (Small Relief). Things are on early stages, they will get more clear after few months.

 

[Lopt Farbauti]

There was a honest suggestion to a UAE FZ company owners not to register for a VAT in another thread and @Fred declared that 99% of the companies do not do it according with his personal experience, so I believe he as well as his customers did not register their companies for a VAT also.

Though CIT is here now, so at least accounting supposed to be done and at most audit.

Therefore I am wondering, what do you think are a possible solutions for those who did not register for VAT (but reached 375K+ threshold) in a following two cases:

1. A company liquidation (audit will show 375K+ turnover)
2. Accounting reports submission (it will also show 375K+ turnover)

Let's keep in mind, the longer owner keeps a silence ignoring a VAT registration, the more penalties one gets in case information will be revealed.

 

[troubled soul]

madihrb said:
Things are evolving here on daily basis, from latest scenario if your freezone business does not qualify for 50 years corporate tax exempt than your tax returns will be filed as mainland company which means no audit required but you have to do the bookkeeping.
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which freezones are qualifying for 50 years corporate tax exempt ?
can you provide more details and source of information ?
Thanks

 

[madihrb]

azb1 said:
which freezones are qualifying for 50 years corporate tax exempt ?
can you provide more details and source of information ?
Thanks
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Almost all of them did, examples are DMCC, Fujairah Creative City which claimed they are giving 50 years guarantee of personal and corporate tax.

Check about section 2013 press release from DMCC:
https://cms.dmcc.ae/application/files/9614/8059/3118/DMCC_10th2013.pdf
As they said:

Resident companies of DMCC are offered highly attractive benefits under a free zone status,including 50-year guaranteed 0% corporate and personal income tax, 100 per cent business ownership,full ownership of business premises, and a secure regulated environment.
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Now they are saying we never broke the promise, you will be tax exempt if you are having qualified activities. They know oil income will go way in coming years, so their strategy is to slowly introduce taxes, its matter of 4-5 years personal income tax will be introduced. Personally I have lost trust, I will be out of UAE around 2025, its better to pay higher taxes and have peace of mind rather living in uncertain environment.

 

[troubled soul]

madihrb said:
its better to pay higher taxes and have peace of mind rather living in uncertain environment.
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Wise word....Who knows Personal tax will be next ?

 

[OTROTG]

azb1 said:
Wise word....Who knows Personal tax will be next ?
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Definitely and it's not a matter of 'if' but 'when'

 

[alessio]

Cristero said:
Thanks for the response @madihrb. So no audit for now for a company that is not a qualifying free zone entity. The small business relief means I don't pay CIT mainly, doesn't it?
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1 - SMF (Small Business Relief) - Exemption for Small Businesses

SMF, which stands for Small Business Relief, provides a significant benefit to small companies and start-ups in Dubai. This exemption is valid until December 31, 2026, and is applicable to businesses with an annual turnover of up to 3M AED. The key advantage of SMF is that qualifying companies will be granted a 100% exemption from Income Tax (IS).

However, it's crucial to pay attention to Article 21 - Small Business Relief, particularly in relation to Paragraph a). This provision states that the revenue of the taxable person for the relevant tax period and previous tax periods must not exceed a threshold to be set by the Minister.

One point that requires clarification is whether this exemption will be applicable from the very first year of business operations or if there is a waiting period of two fiscal years before it takes effect. The language used, referring to "periods" in plural, leaves room for interpretation.

Given the evolving nature of regulations and policies in Dubai, it is essential to approach the current situation with caution. While it's evident that Dubai is making significant strides in its development, there are still many details and information subject to change.

 

[Cristero]

alessio said:
1 - SMF (Small Business Relief) - Exemption for Small Businesses

SMF, which stands for Small Business Relief, provides a significant benefit to small companies and start-ups in Dubai. This exemption is valid until December 31, 2026, and is applicable to businesses with an annual turnover of up to 3M AED. The key advantage of SMF is that qualifying companies will be granted a 100% exemption from Income Tax (IS).

However, it's crucial to pay attention to Article 21 - Small Business Relief, particularly in relation to Paragraph a). This provision states that the revenue of the taxable person for the relevant tax period and previous tax periods must not exceed a threshold to be set by the Minister.

One point that requires clarification is whether this exemption will be applicable from the very first year of business operations or if there is a waiting period of two fiscal years before it takes effect. The language used, referring to "periods" in plural, leaves room for interpretation.

Given the evolving nature of regulations and policies in Dubai, it is essential to approach the current situation with caution. While it's evident that Dubai is making significant strides in its development, there are still many details and information subject to change.
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In my case, I'm pretty far away from any reasonable company revenue threshold I think

 

[troubled soul]

" Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources, but only in so far as such income is derived from a Business or Business Activity conducted by the natural person in the UAE. Any other income earned by a natural person would not be within the scope of Corporate Tax. "

is it correct ?

Source : Federal Tax Authority - Corporate Tax Topics

6.Who is a Resident Person?​

Companies and other juridical persons that are incorporated or otherwise formed or recognised under the laws of the UAE will automatically be considered a Resident Person for Corporate Tax purposes. This covers juridical persons incorporated in the UAE under either mainland legislation or applicable Free Zone regulations, and would also include juridical persons created by a specific statute (e.g. by a special decree).
Foreign companies and other juridical persons may also be treated as Resident Persons for Corporate Tax purposes where they are effectively managed and controlled in the UAE. This shall be determined with regard to the specific circumstances of the entity and its activities, with a determining factor being where key management and commercial decisions are in substance made.
Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources, but only insofar as such income is derived from a Business or Business Activity conducted by the natural person in the UAE. Any other income earned by a natural person would not be within the scope of Corporate Tax.
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Last edited: Jul 22, 2023

 

[hanoib]

azb1 said:
View attachment 5055

" Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources, but only in so far as such income is derived from a Business or Business Activity conducted by the natural person in the UAE. Any other income earned by a natural person would not be within the scope of Corporate Tax. "

is it correct ?

Source : Federal Tax Authority - Corporate Tax Topics
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I don't know if this is correct.

The image shows that if you only conduct business outside UAE, you don't have to register for CT.

What I have read before is that EVERYONE needs to register for CT.

 

[Clank]

hanoib said:
I don't know if this is correct.

The image shows that if you only conduct business outside UAE, you don't have to register for CT.

What I have read before is that EVERYONE needs to register for CT.
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The image on the video seems to be wrong

 

[Cloudbanck]

Jbb1 said:
The image on the video seems to be wrong
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It's for a natural person, so a human and not a company. And I think it is correct that if a natural person doesnt do any business in the UAE he or she isnt subject to corporate tax in the UAE (even if resident in the UAE).

 

[troubled soul]

In official freezone seminar on Corporate tax, experts are also look confused...Very poor explanation. when the participant is asking relevant & clear question ( example Holding of shares & securities) , the panel is answering in a vague and confusing manner with irrelevant area

Even some not official saying that FZ company who doesn't serve clients within UAE falls under qualifying income.

Last edited: Jul 23, 2023