OECD considers UAE Free Zones to be “Not Harmful”

In brief

Pursuant to the meeting of Forum on Harmful Tax Practices (FHTP) in October 2023, the new conclusions has been recently released by OECD wherein “Fee Zones” within the United Arab Emirates (UAE) have now been categorized as “Not Harmful” as a tax practice. Furthermore, the FHTP have not identified any issues in relation to effectiveness in practice of the substance regulations for the year 2022 in the UAE.

In detail

The Organization for Economic Co-operation and Development (OECD) has identified 15 actions to address base erosion and profit shifting (BEPS) in a comprehensive manner. These 15 actions equip governments with domestic and international rules and instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.

In October 2015, the G20 Finance Ministers endorsed the BEPS package which includes the report on Action 5: Countering Harmful Tax Practices. The Action 5 Report is one of the four BEPS minimum standards. Each of the four BEPS minimum standards is subject to peer review to ensure timely and accurate implementation and thus safeguard the level playing field. All members of the Inclusive Framework (IF) on BEPS commit to implementing the Action 5 minimum standard and commit to participating in the peer review.

At its October 2023 meeting, the Forum on Harmful Tax Practices (FHTP) updated conclusions for four preferential tax regimes – Albania, Hong Kong, Armenia and United Arab Emirates (UAE), as a part of implementing the BEPS Action 5. In addition, the FHTP concluded its third annual monitoring process for the effectiveness in practice of the substantial activities requirements in “no or only nominal tax jurisdictions”.

One of the major key takeaways from the above meeting and as per the recently updated conclusions dated February 2024, OECD FHTP concluded the “UAE Free Zones” as “not harmful”, wherein the FHTP observed that the tax regime introduced by the UAE CT Law for the Free Zones is designed in compliance with FHTP standards. . Furthermore, the FHTP have not identified any issues in relation to effectiveness in practice of the substance regulations for the year 2022 in the UAE.

Andersen Takeaway

• It is a welcome step by the OECD which affirms that the newly introduced tax regime for the UAE Free Zones is compliant with the global and international standards and does not pose any risk from tax perspective.
• While this decision will certainly encourage the entities operating out of Free Zones in the UAE, however, Free Zone entities would still need to comply with the prescribed conditions to avail Qualifying Free Zone Person (QFZP) benefits under the UAE CT Law with one of the important conditions being – compliance with the arm’s length principles and transfer pricing documentation.