Free Zone Businesses Expanding to Dubai’s Mainland Must Consider Tax Regulations
Dubai: The Dubai Government’s latest incentives, allowing free zone companies to expand their business activities on the mainland, mark a significant development. This move is particularly important in light of the UAE’s corporate tax framework.
Another major advantage would be if other emirates follow Dubai’s lead, enabling free zone enterprises to establish multiple business activities through mainland branches.
Easing Restrictions on Branch Licenses
“Even before this recent announcement, UAE tax laws permitted free zone companies to establish branches on the mainland,” said Atik Munshi, Managing Partner at Finexpertiza UAE. “However, due to procedural constraints, licensing authorities often did not grant branch licenses for many activities.
“With the Dubai Department of Economy & Tourism (DET) now confirming that it will issue these updated branch licenses, it is possible that other emirates may adopt similar measures.”
For some years, Dubai has allowed businesses to operate on a unified license across free zones and the mainland. This latest initiative further enhances business opportunities, particularly for new entrants. However, with the introduction of corporate tax in the UAE, many businesses have been unsure whether they need to restructure their free zone and mainland operations.
This recent move by Dubai is expected to streamline the process.
Opportunities and Caution for Free Zone Businesses
“Dubai is providing greater flexibility for free zone businesses to expand into the mainland, but they must carefully navigate the corporate tax framework now in place,” said Jai Prakash Agarwal, Vice-Chairman at ICAI Dubai Chapter.
Under the UAE’s corporate tax system, businesses in designated free zones can benefit from a 0% tax rate, compared to the 9% standard rate applied elsewhere. However, companies must meet specific criteria to qualify.
Next Steps for the Dubai DET
In collaboration with relevant licensing authorities, the DET must release a list of economic activities that businesses can conduct within Dubai within six months. The permitted activities will depend on whether the company operates a mainland branch, has its headquarters in a free zone, or holds a permit for specific activities.
“My advice to businesses is to ensure a clear separation between free zone and mainland operations,” Agarwal added. “This should be done not only when establishing a mainland presence but also through a monitoring system to maintain the 0% tax eligibility.
“Otherwise, businesses risk losing this tax benefit. Once lost, it remains unavailable for five consecutive years.”
One-Year Transition Period
All businesses operating outside free zones but within Dubai must comply with the new regulations within one year from the effective date. The DET’s Director-General may grant an additional one-year extension if required.
Awaiting Further Clarifications
“Previously, free zone businesses needed a No Objection Certificate (NoC) from the free zone authority to open a mainland branch or lease office space,” said Jeet Gianchandani, Founder Partner at JCA. “Now, this requirement has been removed.
“However, some activities on the mainland will still require DET approval. We await further clarification on these details.”
Requirements for Free Zone Businesses to Maintain 0% Corporate Tax Rate
To qualify for the 0% corporate tax rate, free zone companies must:
- Maintain a substantial presence within a free zone.
- Earn qualifying income as per the tax framework.
- Not opt for the standard 9% UAE corporate tax rate.
- Comply with arm’s length principles for transactions between related parties and cross-border operations.
- Maintain transfer pricing documentation to ensure transparency.
- Keep audited financial statements as part of compliance measures.
- Ensure that non-qualifying revenue does not exceed either AED 5 million or 5% of total revenue, whichever is lower (the de minimis threshold).
