A Guide on availing 0% Corporate Tax in UAE

Are you a business owner engaged in the Distribution of goods business or are you planning to start the business for distribution in UAE? Are you wondering which jurisdiction you should set up your company? What are the tax differences in Mainland, Free Zone and Offshore for Distribution business? These are questions we are going to clarify through this Article and at the end we make sure that your all questions are answered.

Let us first understand the terminologies;

High sea sales- In simple words, if the goods are purchased from outside UAE and shipped to outside UAE customers without bringing the goods into UAE, we can call it High sea sales

Designated Zones- These are Free Zone which is under the control of the UAE Customs department. Most of the designated zones are located either connected to airports or seaports in the UAE. For VAT purposes in the UAE, designated zones are treated as areas located outside the UAE. Examples: - Jebel Ali Free Zone Authority, Ras Al Khaimah Economic Zone, and Hamriyah Free Zone.

Distribution of Goods/Trading- Specifically for UAE Corporate Tax purposes, Distribution/Trading is referred to as the activity of selling goods or materials for reselling purposes. If anyone is selling to the end consumer, it is no considered as distribution activity for UAE Corporate Tax purposes.

From the above, you must have understood that we are going to analyse the Corporate Tax applicability of a Distribution Company located in a Designated Zone that is engaged in a high-sea sales business model.

Distribution Companies in Designated Zones with High-Sea Sales

Let us dive together, for easy understanding we will discuss an example of a company named Trade Smart Wholesale Trading Company (TSWT Co) engaged in the trading of heavy machinery registered with JAFZA. The suppliers are in the US and the customer is a Chinese Company. The goods are moving from US to China directly without bringing it into UAE. The Chinese company sells the machinery in the local market of China to the consumers.

When TSWT Co purchases goods from outside UAE and sells outside UAE without bringing goods into UAE, in most cases, the income also will be received from a foreign company. If a Free Zone company generate income from outside the Free Zone Jurisdiction, there are 2 primary conditions to be satisfied in order to be eligible for a 0% Corporate Tax;

• The income shall not be generated from an Excluded Activity.
• The income shall be generated from a Qualifying Activity.

Eligibility for 0% Corporate Tax in a Free Zone:

Don't worry about these new terminologies, we have written a detailed blog on eligibility checks for a free zone company for 0% Corporate Tax Read it for more details.

For this case analysis, we know that trading of goods or materials is not considered an excluded activity unless the business is engaged with a natural person (individual) instead of a company.

In Qualifying Activity, there are list of activities published by the authority and a free zone company that gets income from outside the free zone jurisdiction can benefit from 0% Corporate Tax in UAE only if the income is generated from the listed qualifying activities. Let us focus on the activity which is relevant to our discussion. In the Ministerial Decision No.265 of 2023 Article 2(1) (L) explained the qualifying activity of Distribution of goods of material in or from a Designated Zone.

Further in Article 3(L) of the same decision, the Ministry of Finance explained that "Distribution of goods or materials in or from a Designated Zone, includes the buying and selling of goods, materials, component parts or any other items that are tangible or movable and may include the importation, storage, inventory management, handling, transportation and exportation of those goods or materials to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale, provided such activities are conducted in or from a Designated Zone and the goods or materials entering the State are imported through the Designated Zone."

Do not worry about the definition, we are going to demystify this into simple words. Let us break down this into different points for easy understanding.

The goods or materials traded shall be tangible or movable. This means a company that is into software trading cannot become eligible for 0% Corporate Tax under this activity. At the same time, if the software is embedded into any hardware can qualify. TSWT Co is engaged in to trading of Heavy Machineries and it is tangible and movable.

The customer (Chinese Company) shall either resell the goods alter the goods or use the goods as raw material for producing other goods or material. The clause emphasises that the TSWT Co shall not sell the goods to the end consumer. How we will determine whether the Chinese company will use it or resell it? Corporate Tax Guide | CTGFZP1 for Free Zone Person clarified that the distributor (TSWT Co) has to conduct the due diligence(KYC) on the buyer (Chinese Company) in order to make sure that the customer is not the end user.

The Distribution activity shall be conducted in or from a Designated Zone. Let us further divide this sentence;

In Designated Zone- A Company that is into the distribution of goods or materials, importing goods to UAE, the company shall be located in a Designated Zone.

From Designated Zone- A company that is into High Sea sale shall conduct the distribution activity from a Designated Zone, which means the company shall be registered in a Designated Zone.

The TSWT Co is JAFZA registered company who is doing High Sea Sale trading of machineries to a reseller is the outcome of our discussion.

Now, you must have understood that it is very important to determine the jurisdiction where you need to set up your company if you engage in distribution activity. Keep in mind that just because your company is located in a Designated Zone and engaged in Trading business may not qualify your company for 0% Corporate Tax in UAE. Read in detail before making the final decision on your business.

To learn more about Corporate Tax Benefits in Designated Zones for Trading Companies, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.