How Will a Free Zone Branch of UAE Mainland Company Be Treated?
Taxation laws can be complicated, and this is true even for the UAE Corporate Tax Law. To fully understand the law, one must first examine its intent. The Explanatory Guide provides clarification that the law should be simple and permissive, yet it is not necessary to foresee all possible tax exploitation scenarios. This guide also emphasizes the importance of the general anti-abuse rule included in the law. If the law remains silent about a specific scenario, it does not necessarily mean that the activity is permissible.
The guide tackles several tax concepts, which opens up new discussion points. For instance, the Corporate Tax Law specifies that a UAE branch of a company is treated as one and the same “taxable person.” However, the guide introduces a new perspective, stating that a “free zone person” includes branches of UAE mainland companies that are registered in a free zone. This development raises the question of whether a free zone branch may enjoy separate tax treatment or exemption, or if it would be treated the same as the parent company based on tax purposes. If a company intends to have a free zone branch, the variation in tax policy will potentially have a significant impact on the nature of the business.
While many business owners are currently, or plan to, take their salaries and to pay their family members, the guide emphasizes that “dividends” (which are not tax-deductible expenses) include any transaction or arrangement with any related or connected individuals that do not comply with the arm’s length principle. Compliance with this principle also involves various tests, including checking if shareholders comply with service requirements.
The guide also specifies that only a 50% deduction is permissible for entertainment expenses. However, for employee entertainment costs, the amount is fully deductible. This clarification raises questions about allowable expenses where employees and customers/vendors are joint attendees, and the expenses incurred by an owner while wearing the employee hat and under the company’s employment visa.
The guide also highlights withholding taxes, which is an essential aspect companies must consider in the future. The withholding tax rate of 0% (currently) could change via a cabinet decision, and if it does, all UAE companies/payers must comply with the new processes, procedures, and tax payment timelines. Also, each group member (in tax groups) will have individual obligations to deduct taxes as required. The parent company cannot discharge obligations on behalf of other group members.
The guide proposes that qualifying-free zone persons will be taxed at 0% on qualifying income and at 9% on non-qualifying income. The document also clarifies that they will be taxed at 9% on their entire non-qualifying income, unlike mainland companies who may qualify for the slab system on Dh375,000 of taxable income.
In conclusion, the UAE Corporate Tax Law is complex, and business owners must understand the law’s intent to avoid any tax exploitation scenarios. The Explanatory Guide provides a good understanding of the law’s specifics and how to comply with them.