Companies in UAE free zones involved in trading and distribution are scrutinizing their operations to ensure full compliance with corporate tax regulations. Business owners have identified 'grey areas' in audits conducted internally and by external consultants, which need clarification from UAE tax authorities. Last month, the Federal Tax Authority (FTA) released updated guidelines for free zone businesses under the corporate tax regime.
This is crucial as free zone businesses in the UAE are eligible for a 0% corporate tax rate, compared to the standard 9%. A distribution business founder in a Dubai free zone emphasized the importance of conforming to all requirements, such as having audited financial statements and 'adequate substance' in the free zone. However, final approval from the FTA is still necessary after registration, which must be completed by the end of this month.
For trading companies in free zones, the stakes are high. UAE rules stipulate that to benefit from the 0% rate, these businesses must operate from 'designated zones'. Pankaj S. Jain, Managing Director at Ask Pankaj Tax Advisors, stated that these zones are recognized under VAT laws based on criteria such as supervised movement of goods and people.
Jain highlighted key compliance priorities for businesses in designated zones:
Additionally, trading companies in designated zones must only sell goods through a reseller, who must not be the end-user but intends to resell the goods. Ali Nawaz Abbasi, Senior Client Accounting Manager at Sovereign Corporate Services, stressed the importance of conducting proper KYC (know your customer) to meet this requirement.
The FTA emphasizes the need for businesses to continually check their compliance with tax rules at every stage.
