• Toll Manufacturer and Corporate Tax: The tax treatment of income earned by a toll manufacturer in the UAE, who may be a free zone person, is a common question. It revolves around whether such income is subject to corporate tax or exempt, particularly regarding whether it qualifies as qualifying income.

• Toll Manufacturer Definition: A toll manufacturer is an entity that engages in the manufacturing of goods using raw materials provided by another person or contractor for whom they perform manufacturing activities.

• Qualifying Income for Toll Manufacturers: Irrespective of whether the toll manufacturer is producing goods for another free zone entity, a UAE Mainland company, or a foreign company, the income generated from toll manufacturing activities is considered qualifying income.

• Impact: If the toll manufacturer fulfills other conditions required to claim a zero percent corporate tax rate (such as having economic substance in the UAE, not electing to be subjected to UAE corporate tax, and meeting additional criteria), the income derived from toll manufacturing activities will be exempt from UAE corporate tax provisions. As a result, this income will be subject to a zero percent tax rate.

Key Takeaway: The tax treatment of income from toll manufacturing activities in the UAE is straightforward; it is considered qualifying income and can be exempt from corporate tax if the toll manufacturer meets the specified conditions. This exemption is contingent on fulfilling certain criteria, ensuring compliance with UAE tax regulations.

Practical Case Study

XYZ LLC, a company based in a UAE free zone, specializes in toll manufacturing. They manufacture goods using raw materials provided by various clients, including free zone entities, mainland companies, and foreign companies. XYZ LLC is curious about the tax implications of their income earned through toll manufacturing activities.

Key Entities:

1. XYZ LLC: A toll manufacturing company based in a UAE free zone.
2. Client A: A free zone entity that contracts XYZ LLC for toll manufacturing services.
3. Client B: A mainland company in the UAE utilizing XYZ LLC’s toll manufacturing services.
4. Client C: A foreign company outside the UAE that partners with XYZ LLC for toll manufacturing.

Key Questions:

1. Is XYZ LLC’s income from toll manufacturing activities subject to UAE corporate tax, or can it be exempted?
2. Does the income earned from toll manufacturing qualify as qualifying income under UAE corporate tax Law?

Resolution:

1. Qualifying Income for XYZ LLC: The income earned by a toll manufacturer, irrespective of whether they are manufacturing goods for a free zone entity (Client A), a mainland company (Client B) within the UAE, or a foreign company (Client C) outside the UAE, is considered qualifying income.

2. Impact on Taxation: To benefit from the exemption of income earned from toll manufacturing activities, XYZ LLC must meet several conditions. These conditions typically include demonstrating economic substance in the UAE, not electing to be subjected to UAE corporate tax, and satisfying other specific criteria. If these conditions are met, the income derived from toll manufacturing will be exempt from UAE corporate tax provisions, resulting in a taxable rate of zero percent.

Conclusion:

In the case of XYZ LLC, their income from toll manufacturing activities, irrespective of their clients’ locations, qualifies as qualifying income under UAE corporate tax regulations. To enjoy a tax exemption and be taxable at zero percent, XYZ LLC must ensure compliance with the specified conditions.