The purpose of this release is to comment on the current language provided in the UAE CT legislation and consider some of the uncertainties that could adversely impact businesses who are looking to redomicile to the UAE.

If you are currently in the process of redomiciling, or would like to know more about this issue please do reach out to us and we are happy to discuss this further.

In depth

Practical challenges of the current legislation language

Eligibility of Qualifying Free Zone Person regime

Pursuant to Article 11(3)(b) of the UAE CT Law, an entity which is effectively managed and controlled in the UAE should be viewed as a Resident Person for corporate tax purposes.

The definition of Free Zone Person in the UAE CT Law is "A juridical person incorporated, established or otherwise registered in a Free Zone, including a branch of a Non-Resident Person registered in a Free Zone". By virtue of this definition, an entity should not be viewed as Free Zone Person if it is only effectively managed and controlled from a UAE Free Zone and this is supported in the Federal Tax Authority's Corporate Tax Guide on Free Zone Persons (CTGFZP1).

Upon formal redomiciliation into a UAE Free Zone, that entity should be viewed as a Free Zone Person. Therefore, if the activities of the business satisfy all the conditions required to be viewed as a QFZP under Article 18(1) of the UAE CT Law (which are not considered in this release) from the date of redomiciliation into the UAE then it should be viewed as a QFZP and benefit from the 0% corporate tax rate provided under the legislation.

Article 5(2) of the Ministerial Decision No 265 of 2023 states that: "A Qualifying Free Zone Person that at any particular time during a Tax Period fails to meet any of the conditions set out in Clause (1) of Article (18) of the Corporate Tax Law and this Decision and any other conditions prescribed by the Minister shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent (4) four Tax Periods".

As outlined above, an entity effectively managed and controlled in the UAE cannot be viewed as a QFZP until it redomiciles into the UAE since it does not meet the definition set out in the UAE CT Law. Therefore, a strict and literal application of the provisions outlined in Article 5(2) referred to above could result in the disqualification of such person to be viewed as a QFZP where its redomiciliation into a Free Zone happens during the Tax Period (i.e., not at the first day or last day of a Tax Period).

It is also important to highlight that the legislation governing this issue does not provide for any 'split year' treatment which could effectively allow for an entity to split its Tax Period into two separate tax periods and therefore mitigate this issue.

An alternative option to mitigate this issue would be where there is an requirement that an entity de-registers and then re-registers for UAE corporate tax upon redomiciliation. That way, in our view, the entity would be treated as a new taxpayer from the date of incorporation in the UAE and would not be viewed as failing to meet any conditions under Article 18(1) of the UAE CT Law for the relevant Tax Period. However, we have not identified any legislation that states that an entity is required to de-register and then re-register for UAE CT as a result of the change in its status (i.e., redomiciliating into a UAE Free Zone from being an entity effectively managed and controlled in the UAE).

Furthermore, an entity that is registered as being effectively managed and controlled in the UAE is registered for corporate tax purposes as a Resident Person under the category of "Legal Person – Foreign Business", and when it is redomiciled to the UAE it would remain registered as a Resident Person under the category of "Legal Person – Incorporated". As there is no change in registration status (i.e., it remains a Resident Person registration) we would not expect that a corporate tax de-registration and re-registration is required.

Taking the above into account, there exists a risk that the QFZP (0% tax rate) is not available for entities looking to redomicile to the UAE where that entity has its place of effective control and management in the UAE. Whilst this may be an unintended outcome of the current drafting, we encourage clarification from the relevant authorities on the intention of these provisions.

Prior tax filings impacting the Qualifying Free Zone Person status

As outlined above, where an entity has registered for corporate tax due to being effectively managed and controlled in the UAE then the entity would not be eligible to be a QFZP until it is incorporated in a UAE Free Zone (and based on the above thoughts the entity should not be required to deregister and reregister for UAE corporate tax). Therefore, the entity would be subject to tax at 9% and would be required to submit corporate tax returns in respect of its tax periods prior to redomiciliation.

Article 18(1)(c) states that one of the conditions to be a QFZP is that the entity has not previously elected to be subject to corporate tax under Article 19 of the UAE CT Law. As the entity would have been previously subject to 9% corporate tax, it could be determined that the provisions of Article 18(1)(c) has been met and therefore the redomiciled entity could not be eligible to be treated as a QFZP due to its prior tax filings.

Whilst it is our view that such a position should not be taken, as the language of Article 18(1)(c) should only be applicable after an entity has become eligible to be viewed as a QFZP (which wouldn't be possible prior to the entity being redomiciled to the UAE), it should be noted that the position of the Federal Tax Authority on interpretating these conditions is unclear.