Can UAE Free Zone Logistics Firms Lose Their 0% Tax Status for Mainland Services?
The UAE’s logistics sector had much to celebrate when these services became eligible for a favorable 0% corporate tax rate. However, for free zone-based logistics companies to qualify for this rate, it’s crucial to meet the criteria for a “qualifying free zone person.”
These services encompass the storage and transport of goods on behalf of others without taking ownership of the goods. This category extends to various activities, including cargo handling, warehousing, container storage, transport agency services, customs brokerage services, order and inventory management, freight forwarding, document preparation, packing and unpacking, and related services.
To be considered a qualifying free zone person, a company must have an economic and operational presence in a free zone, adequate staff and assets, and incur substantial operating expenses within the free zone for core income-generating activities. Subject to supervision, a qualifying free zone person can outsource its activities to related or unrelated parties within a free zone.
It’s common for logistics firms to engage various service providers to perform parts of the services. For instance, a logistics company might employ a mainland customs broker for completing customs procedures for clients.
This raises a vital question: does engaging a mainland customs broker impact a company’s status as a qualifying free zone person?
If it does, logistics companies may need to restructure their operational processes. Furthermore, it’s important to examine whether customs policy only grants customs broker licenses to companies registered with the Department of Economic Development, or if free zone companies are also eligible.
Another common practice in the logistics industry is warehousing goods in the mainland until they’re ready for export. Could such mainland activities hinder companies from claiming the 0% tax benefits?
A scenario discussed in the UAE corporate tax consultation document issued in August concerns free zone logistics firms performing services within a free zone but providing last-mile delivery on the mainland UAE or in a foreign country. It suggests that income attributable to activities outside the free zone might be subject to a 9% corporate tax if they create a permanent establishment or operate through a mainland branch.
But what if neither a permanent establishment nor a branch is created in the mainland or a foreign country? Would the company still be eligible for the 0% tax rate, or would they be disqualified as a qualifying free zone person?
This situation prompts logistics firms to consider if they necessarily need to open a mainland branch for last-mile delivery or if they can outsource core activities to mainland service providers while paying the 9% tax.
An essential discussion point pertains to inter-country transportation. When a UAE free zone-based logistics firm engages overseas entities for foreign country services, and these activities neither occur in a UAE free zone nor are outsourced to a third party in a UAE free zone, the eligibility as a qualifying free zone person must be carefully evaluated.
While clarity is available on last-mile delivery services, could the same principles be applied to first-mile pick-up services?
The logistics industry must start asking the right questions to anticipate the corporate tax implications of its operations.