Mastering Manufacturing: A Guide for Free Zone Companies for Corporate Tax, UAE

Hey there!

Let’s talk about manufacturing within Free Zone companies. I know it might sound a bit dry, but don’t worry – we’ll break it down in a simple and fun way. Imagine we're just chatting over coffee. Ready? Let’s dive in!

The 0% Corporate Tax Benefit
If a QFZP sells services or goods to Non-Free Zone Persons, the QFZP can benefit from the 0% corporate tax rate if the income comes from certain qualifying activities, including the manufacturing of goods or materials.

What is Manufacturing?
Manufacturing is the process of creating, producing, improving, or assembling products and materials from raw components. This can range from the initial conception of a product to its final stages of production. It includes industries like automotive, textiles, electronics, food, pharmaceuticals, and chemicals.

Qualifying Activities in Manufacturing
If you're a Free Zone Person (QFZP) and your business involves manufacturing, you're in luck. Here are some key activities that qualify:

Production Planning: Developing strategies, timelines, quantities, and procedures.
Production: Converting raw materials into finished products. This can involve assembly lines, handcrafting, or using machinery, and includes packing products for shipping if it’s part of the production process.

Quality Control: Testing and inspecting products to ensure they meet standards and specifications.

Ancillary Activities
Some activities are considered ancillary if they naturally complement the main manufacturing process. These include:

 - Post-Sale Activities: Installation, warranty, maintenance, and upgrades directly linked to the manufactured goods.
 - Customer Support: Providing support after the product has been sold, like handling customer queries and warranty services.

What Doesn't Count as Manufacturing?
Repair activities don’t count as manufacturing. Repairing is about restoring or fixing existing products, not creating new ones or significantly altering their form.

Practical Case Study
Let’s see how this works with a real-life example.

Case Study: Company R
Company R is a QFZP involved in contract manufacturing of furniture like tables, chairs, and beds. Here’s how their activities break down:

 - Revenue from Furniture Sales: AED 7,000,000 from manufacturing furniture for Free Zone and Non-Free Zone Persons.
 - Revenue from Scrap Sales: AED 50,000 from selling leftover materials to another company.
 - Revenue from After-Sales Services: AED 70,000 from installation and warranty services.
So, the total revenue is AED 7,120,000.

The revenue from scrap sales and after-sales services (AED 120,000) is considered ancillary because these activities are closely related to the main manufacturing activity.

Defining Goods
Goods are tangible items produced or manufactured for sale or use, like food, clothing, electronics, furniture, cars, and ships. 

Software sold separately isn’t considered a good, but software embedded in hardware (like a smartphone or a car's navigation system) is considered a good because it functions as a single unit.

Types of Manufacturing
There are two main types of manufacturers:

Contract Manufacturing: Producing goods for and on behalf of another person.

Full-Fledged Manufacturing: Producing your own goods at your own risk.

Why It Matters
Understanding the nuances of manufacturing and qualifying activities can significantly impact your business's tax strategy. It helps ensure compliance with tax laws and maximizes tax benefits.

Need Help?
Feeling a bit overwhelmed? Don’t worry, Fastlane is here to help. We’re experts in corporate tax and can guide you through these complexities. We'll make sure you understand your obligations and help you optimize your tax strategy.

So, let’s make manufacturing simpler and keep your business on the right track!
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