Corporate tax relief for free zone commodity traders in the UAE
Those operating in commodities free zones will be very pleased with the latest corporate tax updates.
The taxation aspect of UAE free zones is back in the spotlight. New cabinet and ministerial decisions, repealing earlier decisions, are effective from June 1, 2023. It has introduced new concepts and clarified pertinent points.
A few interesting discussion points have also emerged with regard to taxation.
Commodities eligible for trading
Commodity traders operating from free zones that are not designated zones have received a big relief. A 0% tax rate would also apply to income derived from trading 'qualifying commodities' with non-free zone residents (domestic or overseas).
In the UAE or overseas, qualifying commodities include metals, minerals, energy, and agriculture commodities traded in raw form on a recognised commodities exchange market. A derivative trade is used to hedge against risks associated with physical trading of these commodities.
Intellectual property that meets the qualifying criteria
The ownership or exploitation of all intellectual property assets was previously specifically excluded from the 0% rate. Income derived from the ownership of 'Qualifying Intellectual Property' is eligible for 0% tax under the revised decisions.
Patents and copyrighted software qualify as qualifying IP. Other rights that are functionally equivalent to a patent are also included. Patents are not eligible for utility models, IPR for plants and genetic material, orphan drug designations, or extensions of patent protection.
To qualify for the 0% tax rate, it is important to maintain 'adequate substance'. In order to have adequate substance, one must conduct core income-generating activities (CIGAs), maintain adequate assets, employ a certain number of people, and incur operating expenditures.
Income-generating activities are primarily those that drive business value, not mostly support activities. A sufficient number of full-time employees is required. In such a free zone - or a designated zone - where the qualifying activity is conducted, the adequate substance should be maintained. It is even necessary for third parties to which core income-generating activities can be outsourced to meet this location requirement.
Considerations
The income from headquarter services to related parties - eligible for 0% - has now been explained in detail. Administration, oversight and management of related parties' business activities are included in 'headquarter services', including senior and general management, captive insurance services, administrative services, procurement services, business planning and development, risk management, coordination of group activities, and in general incurring expenditures on behalf of related parties and providing support services to related parties.
It is important to treat the 'headquarter services' with care. The question remains whether mainland companies - otherwise ineligible for the 0 percent rate and/or operating mainland retail stores - could restructure their management (including owners' salaries) into a separate free zone company.
Distributing goods and materials in or from designated zones has been explained in detail, addressing pertinent concerns of taxpayers. There are many interesting scenarios that still require careful evaluation, such as the distribution of non-resale equipment or ensuring overseas customers are resellers, or trading goods that are not qualifying commodities.
As free zone tax incentives become more clear, business owners need to ask the right questions to maximize the tax impact and compliance requirements.
For more information on Corporate Tax, contact the team at Zyla Accountants today.