New Dubai free zone rule clears way for ‘more’ business activities on Mainland

Dubai: Allowing more business activities on the mainland by free zone based companies in Dubai will be the single biggest incentive through the new incentives announced by the Dubai Government. The move assumes extra significance given that the UAE now has a corporate tax regime.

A second big boost would be if other emirates too allow free zone enterprises to launch multiple business activities through a branch on the mainland.

“Even before the new Dubai announcement, the UAE’s tax rules permit free zone companies to have branches on the mainland,” said Atik Munshi, Managing Partner at the consultancy Finexpertiza UAE. “But due to procedural restrictions, the licensing authorities were not allowing branch licenses for most activities.

“Now, with the clarification that DET (Department of Economy & Tourism) in Dubai will start issuing such updated branch licenses, other emirates too could follow suit.”

Dubai for some years has allowed businesses in the free zone and mainland to operate on a unified license. The latest announcement scales up possibilities for businesses, especially new entrants, to opt for. But with the UAE announcing that enterprises in the country will come under the corporate tax, it led businesses with free zone and mainland operations to wonder whether they would have to repurpose these operations.

Now, the latest Dubai initiative should help smooth out the process. (Under UAE corporate tax, companies operating in designated free zones are eligible for 0% tax against the 9% elsewhere in the country. But these businesses need to meet certain provisions to be eligible.)

“Though the corporate tax rate is low in UAE, many trading businesses traditionally operate on low net margin and they thrive on volumes,” said Munshi. “Free zones would be ideal for such companies.

“Now that free zones are allowed to open branches on the Dubai mainland, any physical presence inconvenience is also eliminated. But they would be required to maintain independent records for tax purposes.”

What the Dubai DET has to do next
The DET – in coordination with the licensing authority – must issue a list of economic activities that businesses can conduct in Dubai within six months. This will depend on whether they hold a branch license in the emirate, a branch with headquarters in the free zone, or a permit for specific activities.

1-year grace period
All establishments operating outside the free zone and within the emirate of Dubai must comply with the new provisions within one year from its effective date. (If needed, the Director-General of the DET may extend this period for an additional year.)

Conditions for free zone entity to be rated at 0% for corporate tax

• Must maintain ‘adequate substance’ in a free zone.
• Must derive qualifying income.
• Must not have made an election to be subject to the standard UAE corporate tax rate of 9%.
• Must comply with the ‘arm’s length principle’ for transactions with related parties and for arrangements between the parent free zone enterprise and its foreign or domestic permanent establishments.
• Must maintain transfer pricing documentation.
• Must maintain audited financial statements.
• The non-qualifying revenue must not exceed the lower of Dh5 million or 5% of total revenue (which is the ‘deminimis’ threshold).