TRADING BUSINESS QUALIFYING FREE ZONE PERSON TAX REGIME OF UAE
First Questions to ask – B2B or B2C, and “De Minims” Limit
The first question that a UA trading business in the UAE should ask itself is:
What percentage of your revenue is B2B, and
- what percentage is B2C?
- If your B2C revenue exceeds
- 5% of your total revenue, or
- 5 million dirhams.
You can’t claim the Qualifying Free Zone Person exemption.
Let’s see an example
If your total revenue were 90 million dirhams and your B2C revenue were 4.8 million dirhams then your B2C revenue is already less than the second limit of 5 million dirhams.
Can you now claim the Qualifying Free Zone Person exemption?
The answer is no, because, despite the fact your B2C revenue is less than the 5 million limit, it exceeds the 5% limit, that is, 4.5 million. Your B2C revenue must not exceed both limits
Tax Strategy if De Minims Limit is Breached
What should the UAE traders do when their B2C revenue exceeds the limit and does not allow you to become a Qualifying Free Zone Person?
If your B2C revenue exceeds both the 5 million dirhams limit, and the 5% of your total revenue limit, then:
- Consider splitting your company into two companies, that is. B2B and B2C.
Your B2C business is like a tumor for the Qualifying Free Zone Person exemption. It needs to be removed from your B2B business and set up as separate entity, or else, it will destroy your Qualifying Free Zone Person exemption available for your B2B business. - Or you may want to become a wholesaler so that all your revenue is B2B.
- That was only the first condition to claim the Qualifying Free Zone Person exemption.
- Now, as the second condition, we shall see if your company and warehouse set up in a Designated Zone?
- You only require your B2B company and goods storage to be in a Designated Zone to enjoy Qualifying Free Zone Person exemption.
- Now check if your company and your warehouse are set up in a Designated Zone, just a Free Zone or mainland. • If your company is not already registered in a Designated Zone then it’s time to move your B2B business to a Designated Zone.
You will need a cost-benefit analysis to compare the following:
- The cost of setting up your company and warehouse in a Designated Zone
- Tax savings due to moving your company to a Designated Zone from a simple Free Zone or Mainland
Designated Zones
- You may be thinking, “Why are we using the words “Designated Zone” as different from “Free Zone”?
Well! There are more than 50 Free Zones in the UAE, but not all of them are Designated Zones. There are only 24 Designated Zones in UAE. Designated Zones are fenced zones where Customs procedures apply. Moving goods in or out of a Designated Zone requires Customs Declarations being prepared by the traders registered in that Designated Zone.
Too many Customs Declarations?
It can be a pain in the neck to prepare hundreds of Customs Declarations on daily basis if your sales are sizeable. • To avoid that, you could use your already existing simple Free Zone or Mainland company as buyer of goods from your Designated Zone company.
- This way arm’s length profit on sale of goods from your Designated Zone company to your simple Free Zone or Mainland company will stay back with the Designated Zone company and enjoy zero Corporate Tax. No more hundreds of Customs Declarations!
- The simple Free Zone/Mainland company can then make sales to all customers whether B2B or B2C. There will be tax on those sales but far less than the tax you would have to pay if you hadn’t gone to the Designated Zone and saved a big part of that tax.
Do the company and the warehouse need be in the same Designated Zone?
You may also be thinking the question, “Must my company and the warehouse be in the same Designated Zone?” • The answer to that is no. Your company may be in Hamriya Free Zone but the warehouse may be in SAIF Zone (both Designated Zones). It doesn’t make a difference from Corporate Tax view as long as your company is set up in a Designated Zone, and also goods move in or out from a Designated Zone.
- Let’s say you have a company in JAFZA (a Designated Zone) but your warehouse is in Dubai Textile City (not a Designated Zone). You import goods directly into your DTC warehouse. Can you prepare the invoice from your JAFZA company and the income will still remain Qualifying Income?
- The answer is no. Your goods are not moving in or from a Designated Zone, which is a condition for your income to be a Qualifying Income. No Qualifying Income, No Qualifying Free Zone Person exemption!
Importing Goods into UAE
You may have a question, “Which of the two companies should import goods into the UAE, the Designated Zone one or the Mainland/Free Zone one?”
- The answer to that is that the Designated Zone company must import goods into a Designated Zone, and store them there. Sales should happen from Designated Zone, and goods should move from Designated Zone to the customer.
High Sea Sales
You might also want to know, “What about the Qualifying Free Zone Person exemption of high sea/third port sales?” • The answer is that if your Designated Zone company administers the process, then such sales will be seen as Qualifying Income and you will get the Qualifying Free Zone exemption.
Disclaimer:
The use of complex legalese language is intentionally avoided in the text herein above to captivate attention and interest of the common layman reader. This LinkedIn article does not comprehensively cover the contents of the provisions laid out in the legal framework of the jurisdiction in question and is likely to present personal opinions of the Author, which may be wrong or technically misleading, in spite of Author’s bona fide intentions to share knowledge through this Article, free of charge to general public, and for which the Author has not received any remuneration from any party. Please use your own discretion before relying on the contents herein above. The Author or any party associated with him do not accept any responsibility for any actions taken on the basis of this LinkedIn article.