In a significant move surrounding corporate tax in the UAE, the Ministry of Finance has detailed tax implications for manufacturing activities, particularly focusing on free zones versus mainland operations.
Corporate Tax in Free Zones Vs. Mainland
Manufacturing activities in the UAE’s free zones generally enjoy a 0% corporate tax rate. In contrast, businesses on the mainland are subject to a 9% corporate tax. This differentiation underpins the Ministry’s drive to foster business growth within these zones.
Two Main Categories of Manufacturers Outlined
The UAE Ministry of Finance Corporate Tax Consultation Paper has identified two primary manufacturing categories:
Contract or Toll Manufacturing: These entities manufacture products for another party. When situated in free zones, their income from manufacturing services qualifies for 0% corporate tax. This remains consistent regardless of the contractor’s location, be it in a free zone, the mainland UAE, or even internationally. It’s pivotal to understand that while contract and toll manufacturing seem similar, the latter involves the contractor supplying the essential raw materials and design specifics. Therefore, toll manufacturers in free zones are also eligible for the 0% corporate tax on their qualifying income.
Fully Fledged Manufacturing: Here, companies produce goods under their brand, procuring their raw materials. The income from these manufacturing tasks in free zones is exempt from corporate tax, regardless of whether the products are for the mainland or global entities. However, the twist lies in the distribution: profits from the sale of these goods don’t count as ‘qualifying income from manufacturing’. Consequently, these are subjected to the 9% corporate tax. But there’s a caveat. If the distribution is from a designated free zone, the income qualifies for 0% tax.
Expert Insight
Prateek Tosniwal, a partner at MI Capital Services, underscores the importance of this corporate tax update. He suggests that to leverage these tax benefits, free zone manufacturers must maintain separate account books for manufacturing and distribution. This will ensure clarity and compliance in the evolving tax landscape.
With the corporate tax scenario undergoing these nuanced changes, businesses in the UAE are advised to stay updated and optimize their operations to maximize benefits.
