Contract Manufacturer Income and UAE Corporate Tax: The tax liability of a contract manufacturer in the UAE depends on whether its income is considered qualifying income for corporate tax purposes.

• Location of Contract Manufacturer: If a contract manufacturer is based in a UAE free zone, the location of the entity for which it performs contract manufacturing is not a determining factor. This applies whether the entity is also in the free zone, in the UAE Mainland, or outside the UAE.

• Qualifying Income Condition: For the income of a contract manufacturer to be considered qualifying income for corporate tax purposes, it must meet certain conditions, including compliance with substance requirements and other regulations under the UAE corporate tax law.

• Exemption from UAE Corporate Tax: If the contract manufacturer fulfills the necessary criteria and is not expected to be subject to corporate tax due to its compliance with UAE regulations, the income it earns will be exempt from UAE corporate tax.

Practical Case Study

ABC LLC, a contract manufacturer based in a UAE free zone, specializes in producing electronics for various clients. They are exploring the tax implications of their income under the UAE corporate tax law.

Key Entities:

1. ABC LLC: A contract manufacturing company operating from a UAE free zone.
2. Client A: A client based in the same UAE free zone.
3. Client B: A client situated in the UAE Mainland.
4. Client C: A client located outside of the UAE.

Key Questions:

1. Is ABC LLC’s income liable for UAE corporate tax, or can it be exempted?
2. What conditions must ABC Manufacturing meet to ensure their income is considered qualifying income for corporate tax purposes?

Resolution:

1. Location of Contract Manufacturer: According to the consultation document issued, the location of the client does not impact the tax treatment of ABC LLC’s income. Whether they are providing contract manufacturing services to a client in the same free zone (Client A), the UAE Mainland (Client B), or outside of the UAE (Client C), the income earned by ABC LLC can be considered qualifying income.

2. Conditions for Qualifying Income: To ensure that their income remains exempt from UAE corporate tax, ABC LLC must meet various conditions. One crucial condition is complying with the substance requirements set forth by the UAE corporate tax law. These substance requirements involve demonstrating a substantial presence and economic activity within the UAE.

Conclusion: ABC Manufacturing, as a contract manufacturer in a UAE free zone, can enjoy the exemption from UAE corporate tax for their income, regardless of their client’s location. However, they must diligently meet the substance requirements and adhere to other relevant regulations under the UAE corporate tax law.