Determining UAE Corporate Tax Free Zone Exemption & Qualifying Income
06 Jun, 2023 / Haroon Juma / Corporate Tax
The Corporate Tax Law published on 9th December 2022 defined a category of a so-called “Qualifying Free Zone Person”, a company registered in a Free Zone, which will be able to retain the tax exemption (0% corporate tax rate) for the remainder of the period stipulated in the applicable legislation of the Free Zone. The Free Zone tax regime is applicable within the prescribed geographical areas of the free zone and applies only to income derived from activities performed in or from within a free zone.
Under this Decision, the Ministry of Finance has provided clarity on the definitions for Free Zone companies to exercise continued Free Zone Corporate Tax exemptions.
What Conditions Must Be Satisfied To Retain 0% Corporate Tax Rate?
To be considered a Qualifying Free Zone Person, the Free Zone company must:
● Maintain adequate substance in the UAE (in line with the UAE economic substance requirements);
● Derive “Qualifying Income”
● Not elected to be subject to Corporate Tax at the standard rates; and
● Comply with the transfer pricing (“TP”) requirements under the Corporate Tax Law.
If a Qualifying Free Zone Person fails to meet any of the conditions or makes an election to be subject to the regular Corporate Tax regime, it will be subject to the 9% corporate tax rate.
What is Qualifying Income?
Free Zone businesses can benefit from 0 per cent corporate tax applied on ‘all activities’ related to transactions with other free zone entities.
Under the Decision, this would include:
• Income derived from transactions with other free zone Persons, except for income from ‘excluded activities”
• Income derived from transactions with any person – domestic and foreign – in the case of “qualifying activities’, except for income from excluded activities.
In addition, the Decision introduces an additional benefit to allow a small amount of revenue for non-qualifying income, the ‘de-minimis’
A Free Zone entity can earn a small or incidental amount of non-qualifying income – without being charged under corporate tax. The ‘de-minimis’ threshold must not exceed the lower of Dh5 million or 5 per cent of total revenues. (De-minimis in tax parlance relates to amounts deemed small or marginal.)
Free zone qualifying activities
The free zone corporate tax coverage applies only to income derived from activities performed exclusively in or from within such an entity.
This is reflected in the definition of ‘qualifying income’, which includes income derived from transactions with other free zone persons as well as domestic and foreign sourced income from conducting any of the ‘qualifying activities’
• Manufacturing of goods or materials;
• Processing of goods or materials;
• Holding of shares and other securities;
• Ownership, management, and operation of ships;
• Reinsurance services;
• Fund management services that are subject to the regulatory oversight of the competent authority in the UAE;
• Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE.
• Headquarter services to related parties;
• Treasury and financing services to related parties;
• Financing and leasing of aircraft,
• Logistics services;
• Distribution in or from a designated zone that meets the relevant conditions; and any activities that are ancillary to the above-mentioned activities.
Income from certain specific ‘excluded activities’ will not be treated as ‘qualifying income’ regardless of whether the income is derived from a free zone entity or as part of undertaking a ‘qualifying activity’.
• Income derived from transactions with individuals;
• Income derived from certain regulated financial services activities;
• Income derived from intangible assets;
• Income derived from immovable property, other than transactions with free zone enterprises in relation to commercial immovable property located in a free zone.
Earning income from ‘excluded activities’ or earning any other income that is not ‘qualifying income’ will disqualify the free zone person from the regime.
What is defined as “Substance”?
This decision also clarifies the nature of Substance to attain status as a Qualifying Free Zone Person.
• A Qualifying Free Zone Person shall undertake its core income-generating activities in a Free Zone
• Have adequate assets, an adequate number of qualified employees, and incur an adequate amount of operating expenditures.
• Activities can be outsourced to a Related Party in a Free Zone or a third party in a Free Zone, provided the Qualifying Free Zone Person has adequate supervision of the outsourced activity.
Additional decisions are expected on the specific implementation rules in due course.
If you operate and Free Zone and wish to maximise the eligible benefits and reduce compliance risks, we can provide a free consultation to ensure your business is optimizing for CIT.
SimplySolved is an FTA Accredited Tax Agency with ISO 9001 Quality & 27001 Information Management Certification, we offer a quality-based approach to our services supported by a dedicated team of certified professionals.
Our offerings are specially designed to meet the UAE Regulations to put you in control, comply with the regulations and help you make better business decisions. With experience and local knowledge, we partner with our clients to find solutions and manage their risk in relation to their challenges and objectives.
While this article provides high-level guidance, it is not a substitute for tax or legal advice, and we encourage you to seek advice regarding the specific matters that concern you. If you wish to speak to us, you may contact us for a no obligation consultation.
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