Introduction - First things first !
What is Corporate Tax (CT) in UAE ?
The United Arab Emirates (UAE) introduced corporate tax (CT) with effect from 1st June 2023, with a standard rate of 9% and preferential rate of 0%. However, only Qualifying Free Zone Persons (QFZP) in the UAE are eligible for a preferential 0% CT rate , that too only on their Qualifying Income (QI), subject to certain conditions. To learn more about introduction of Corporate Tax in UAE, click here.
What is a Free Zone for CT purposes ?
As per Corporate Tax Law, Free Zone means “A designated and defined geographic area within the State that is specified in a decision issued by the Cabinet at the suggestion of the Minister.”
Therefore to be considered a Free Zone for Corporate Tax purposes it must fulfill two conditions viz.
- It must be a designated and defined geographical area within UAE and
- It must be specified in a Cabinet Decision.
Since all the Free Zone Authorities in UAE and are designated and defined by the respective laws underwhich they are established they all fullfill the first condition, however since the above-mentioned Cabinet Decision is still pending (not yet issued), we cannot conclusively comment whether a particular Free Zone will also be considered a Free Zone for Corporate Tax Purposes.
What is the preferential CT treatment for free zones in the UAE?
The preferential CT treatment for free zones in the UAE is a 0% CT rate on qualifying income. This means that qualifying free zone persons (QFZPs) are not required to pay any CT on their qualifying income.
Qualifying Free Zone Persons (QFZP) - What / How ?
Who is a Qualifying Free Zone Person ?
As per Corporate Tax Law, a Qualifying Free Zone Person (QFZP) is “A Free Zone Person that meets the conditions of Article 18 of this Decree-Law and is subject to Corporate Tax under Clause 2 of Article 3 of this Decree-Law.”
Therefore to be called a QFZP a business must be :
- Registered in a Free Zone and
- Fulfill the conditions under Article 18 (discussed next) and
- Should be taxed under Clause 2 of Article 3 (i.e. 0% on Qualifying income and 9% on Non-Qualifying Income).
How to become a Qualifying Free Zone Person ?
As per Article 18 of Corporate Tax Law, for a Free Zone Person (FZP) to become a Qualifying FZP, they must :
1. Maintain Adequate Substance in UAE.
This means that the company must have a real and meaningful presence in the UAE, with adequate employees, assets, and activities. The UAE CT authorities have issued guidance on what constitutes adequate substance, but the specific requirements will vary depending on the nature of the company’s business and is a subjective matter.
2. Derive Qualifying Income
This is the the most important condition and is therefore covered in detail in the next section.
3.Not elect to be taxed at regular rate under Article 19.
Article 19 give the the qualifying free zone person an option to elect to be taxed at regular rates. For benefitting from the preferential CT treatment, the QFZP must not elect this option.
4. Complying with Article 34 and Article 55.
Article 34 deals with Arm’s Length Principle and Article 55 deals with documentation of Transfer Pricing. Compliance with former would mean to use the Arm’s Length Principle in determining taxable income, transactions ans arrangements between related parties and compliance with later inter-alia would essentially mean filing a disclosure (along with annual tax return) containing information regarding the transactions and arrangements with related parties and connected persons.
5. Meet any other conditions as may be prescribed.
Qualifying Income - What is it ?
How will the Pharma industry adapt in the face of these changes?
Comprehending the Corporate Tax (CT) rules and evaluating their implications is of paramount importance for all businesses operating in the UAE, to ensure compliance and optimize tax efficiency. Drawing from our experience, it is suggested that pharmaceutical companies might need to concentrate on two departments viz. Tax Considerations and Regulatory Considerations
Analysis of Tax and Regulatory Considerations
|FOCUS AREAS||TAX CONSIDERATIONS||REGULATORY CONSIDERATIONS|
|IMPACT ASSESSMENT||Conduct a CT impact analysis, mapping the tax implications of all business activities, the effect on profitability, and the businesses' effective tax rate. Reconsider the pricing of products or services and agreement terms to ensure business profitability.||Any proposed changes to pricing must be scrutinized against the relevant pharmaceutical regulations, including pharmaceutical pricing controls.|
|BUSINESS RESTRUCTURING||Assess if the business structure necessitates restructuring, particularly if UAE Free Zone entities have non-passive income sourced from the UAE mainland.||The incorporation of new entities into the business structure may necessitate obtaining the appropriate commercial licenses and regulatory approvals.|
|TRANSFER PRICING||To ensure arm's length terms for related party transactions, reassess any pricing for related party products or services and ensure such transactions are adequately backed by transfer pricing documentation.||Consider the potential adverse impact of pharmaceutical laws and regulations on such arrangements.|
|COMPLIANCE||Ensure the business is registered for CT with the Federal Tax Authority, is prepared to file CT returns within the stipulated deadlines, and maintains sufficient documentation to support CT filings.||Ensure adherence to any obligations imposed by the relevant authorities that regulate the business entities or their activities.|
Impact analysis on Life Sciences ?
As the landscape of business models and regional regulations evolves, tax planning has become increasingly intricate. The implementation of Corporate Tax (CT) in highly regulated sectors, such as the life sciences industry, necessitates a thorough evaluation of any changes to the business model against the industry’s governing laws and regulations. This is crucial to prevent inadvertent breaches of regulations, such as controls on product pricing and restrictions on entities permitted to conduct pharmaceutical sales.
The introduction of CT will have implications for pharmaceutical companies, regardless of their operational structure – whether they maintain their own trading entities in the region, utilize third-party distributors, have established a representative office, or have entered into toll manufacturing arrangements.
A significant number of pharmaceutical companies depend on third-party distributors. However, the structure of these distribution arrangements may trigger CT exposure. Additionally, while scientific offices/marketing firms (SOs) are primarily restricted to promotional activities, some SOs operate beyond these boundaries, potentially leading to CT exposure.
In conclusion, the UAE’s new Corporate Tax (CT) law presents a significant shift for businesses, including the pharmaceutical industry. This change requires careful navigation, considering the potential for CT exposure and the need for regulatory compliance.
At Protax, we specialize in understanding these complexities. We invite pharmaceutical businesses to leverage our expertise for a comprehensive Corporate Tax Impact Assessment and implementation strategy. Our team is ready to guide you through this transition, ensuring compliance and tax efficiency. Reach out to us today – let’s navigate this new tax landscape together.