16 Corporate Tax Questions Every Businesses Should Understand

 The Federal Tax Authority of the UAE has issued a new reference guide to clarify most commonly asked questions regarding corporate tax.

This is not a burden of new tax rules but a guidance book that explains the existing legislation to address the queries of taxpayers related to investment funds, REITs, free zones and mainland businesses, partnerships between locals and overseas, and the licensing of foreign businesses.

It is important to understand these new clarifications to avoid any corporate tax penalties. In this article, we will summarize answers relating to most commons questions that this guide clarifies:

1 – How Does FTA Treat Multiple Free Zone and Mainland Branches?

If a business operates multiple branches located in different free zone areas, it will be assessed as a single business organization. The revenues generated, costs incurred, and other operations across various branches of a business will be counted collectively for tax qualification.

The rule is completely different if a branch is located on the mainland. In such a case, the mainland branch is considered a separate “permanent establishment,” and the income generated is viewed separately, and the firm has to pay standard 9% corporate tax if applicable.

2 – Does a Foreign Business Need a UAE Trade License for Tax Qualification?

Foreign companies do not need a UAE license to get taxed. If a company is operating in the UAE for more than six months of a relevant 12-month tax year and its core income-generating activities are being carried out here, they will likely have to pay corporate tax.

For taxable presence, your company should have a permanent establishment in the UAE, meaning your business has a factory, office, or a rented desk. The tax authority considers actual physical existence of a business and its activities instead of mere paper certifications.

3 – How Does FTA Deal with Transfer Pricing Modifications?

Trading (buying and selling) with subsidiary branches at less prices won’t affect a company’s status as a Qualifying Free Zone Person (QFZP), if it corrects and makes adjustment to comply with the transfer pricing rules when filling corporate tax returns.

Even if the initial financial statements do not reflect arm’s-length prices, making the correct transfer-pricing adjustments in filing the Corporate Tax Return will still protect it QFZP status.

4 – Who is a “Beneficial Recipient”?

According to the FTA, a customer will be the “Beneficial Recipient” if they have official ownership and total control of the product that your company sold them. This rule helps the tax authority to distinguish between true buyers and service providers.

5 – Do Imported Goods Generate Qualifying Income?

The income generated from imported items or bought from mainland suppliers can be a qualifying income if certain conditions are met. A company must meet two specific conditions regarding the buyer: firstly, the buyer should be in a free zone; secondly, the buyer should be an ultimate beneficial recipient.

For example, a business will incur zero percent tax if it imports a product from the mainland area and resells the product to a customer who is a Beneficial Recipient located in one of the free zones.

6 – What Does ‘Adequate Substance’ Mean According to the FTA?

Adequate substance proves that your company is physically present in the free zone area. It means the business is genuine and is practically operating.

To maintain adequate substance in the UAE, a company has to prove that they have physical presence like capital assets, qualified staff, daily production expenses and core income generating activities.

A company cannot simply claim 0% tax if the actual work of the business is happening on the mainland or elsewhere. To actually enjoy QFZP status, the company must demonstrate the existence of real employees, real expenses, and real assets inside the Free Zone.

7 – Does an Overseas Warehouse Affect Free Zone Status?

Third-country trading or overseas warehouses do not disqualify the QFZP status, but the condition is that the main activities and management of the business should be inside the UAE Free Zone.

8 – How is Income from REITs and Investment Funds Taxed?

FTA’s guidance regarding Real Estate Investment Trusts (REITs) is very straightforward. For REITs, tax is only applicable to the distributable income rather than the total net profit or unrealized gains.

The FTA also clarifies that Qualifying Limited Partnership (QLPs) that invest in companies with real estate income get to keep their tax-free status because they are simply acting as a shareholder, not as a direct real estate investor.

9 – Is it Mandatory for Foreign Investors to Register for Corporate Tax?

Cross-border investors in qualifying limited partnerships who don’t have any other taxable presence, for example, a permanent establishment or any other taxable nexus in the UAE, do not necessarily require corporate tax registration. Registration is mandatory if a foreign investor is a taxable person, which means they possesses taxable nexus in the UAE.

10 – Is there a Distinction Between Family Foundations and LLCs?

FTA clearly differentiates a family foundation from an active commercial business. Family foundations can apply for tax-transparent status. If it gets approved, FTA treats it as individual family member income and the corporate tax liability becomes effectively zero. However, FTA has also strictly clarified that you cannot claim tax transparency just because an LLC or a private company is investing on behalf of family members.

11 – Is Patent or Copyright Registration Necessary for an IP?

There is no mandatory requirement for patent or copyright registration if UAE property rights laws already protect the intellectual property (IP) upon its creation.

The authority clarifies that the income generated from an IP, that is not registered, also qualifies for corporate tax. The main focus is on the existence and ownership of the IP and the income it generates, not on whether it is registered or not.

12 – What is the Ruling for Shipping and Logistics Activities?

As per FTA, simply buying and selling ships does not qualify as a qualifying activity. However, activities and services related to below may qualify as qualifying activities:

• ship ownership,
• management of ships,
• physical operations of ships,
• port agency,
• and cargo handover services.

13 – What Financial Services are Qualifying Activities?

In case of financial services such as wealth management, FTA makes a distinction between brokerage services and advisory services when determining qualifying activities. Referral commissions from advisory and wealth management services may, in some cases, qualify. However, brokerage and matched-principal trading activities usually do not qualify.

14 – What Does Headquarters Services Include?

According to the FTA, the headquarters services comprise a wide variety of administrative support, including strategic group management & organizational planning, central purchasing, captive insurance, and financial risk management.

The routine IT and marketing services to a single company are not considered as headquarter services and will not fall in the zero percent tax category.

15 – How Does FTA Explain the Processing and Commodity Trading Activities?

Packaging and repackaging can be categorized as a processing activity, so it may qualify for zero percent tax. Further, the trading in the commodity market and hedging derivatives may also fall in the tax-free category, but the trading of speculative derivatives is not allowed for this qualification.

16 – How Does FTA Treat Sale of Shares?

FTA states that an early sale of shares within a 12-month period does not necessarily take away your 0% tax rate status. If a company can provide evidence that proves its original intention was to hold shares for a long time, the sold shares may still qualify as investment.

It’s important to reiterate that the FTA is not aiming to amend the existing legislation about the corporate tax laws of the UAE with this new guide. Instead, it is the official interpretation of the questions usually asked by the taxpayers. After this interpretation, tax compliance should become clearer and easier to follow. Moreover, the official clarification can save businesses from corporate tax penalties arising from any misunderstandings.