UAE free zones have been a key component of the UAE's wealth system for more than four decades.

UAE free zones have  been a key component of the UAE's wealth system for more than four decades.

With the introduction of corporate tax in the UAE, there is a doubt that the free zones will be adversely affected.

UAE CT Public Consultation Document an existing tax incentives are respected for free zones

The government has expressed its commitment to keep free zones attractive by expanding corporate tax incentives. Businesses operating in free zones should review their existing supply chain and operational structure and restructure wherever necessary to ensure compliance with the conditions for claiming the benefit of 0 percent CT rate.

F Z P If businesses set up FZPs for financial housing to maintain sufficient substance, comply with regulatory requirements and benefit from a zero percent corporate tax rate. With domestic transfer pricing and a corporate tax regime in place, now is the time to check and insulate your FZP's income from the 9 per cent corporate tax.

An FZP deriving trading income from transactions with FZPs will continue to benefit from zero percent CT rate.

An FZP deriving passive income (interest, dividends, royalties and capital gains) from the mainland will continue to benefit from the 0 percent CT rate.

Rental income is currently not mentioned in the category of passive income.

An FZP deriving income from a mainland group company will also continue to benefit from the 0 per cent CT rate.

Income derived from the sale of goods through an FZP located in a designated zone for VAT purposes is not subject to the 0 percent CT rate as it imports a Mainland business record. Also, if a F zp has a branch in the UAE, it will be taxed at 9 percent on mainland-sourced income and 0 percent on other income. An FZP deriving any mainland source income other than mentioned above will lose the benefit of 0 percent CT rate in respect of all its income.

Tax implications on FZPs in terms of transactions with the mainland will be one of the critical aspects of the UAE CT regime. Transactions undertaken by FZP with the mainland need to be cautious about the permissibility of the said transactions as non-compliance with regulatory requirements will lead to denial of benefit of 0 percent CT rate for all income streams.

In the absence of detailed guidance in this regard the method of allocation of income to a mainland branch of FZP will be subjective. It also needs to be checked whether compliance with financial material restrictions is sufficient. Some clarification in the final rule may help in this regard.

Whether MNEs (Multinational Enterprises) operating in Free Zones in violation of Pillar Two threshold will be given 0% CT rate benefit

Perhaps, this is the perfect time to review business operations, maximize profits under the 0 percent tax rate and prepare for the 9 percent corporate tax.

In the absence of detailed guidance in this regard the method of allocation of income to a mainland branch of FZP will be subjective. It also needs to be checked whether compliance with financial material restrictions is sufficient. Some clarification in the final rule may help in this regard.

The government has expressed its commitment to keep free zones attractive by expanding corporate tax incentives. Businesses operating in free zones should review their existing supply chain and operational structure and restructure wherever necessary to ensure compliance with the conditions for claiming the benefit of 0 percent CT rate.

It should be clarified whether MNEs (Multinational Enterprises) operating in free zones will be given 0% CT rate benefit in violation of the pillar two threshold.