Who Can be a Qualifying Free Zone Person (QFZP)?
1. Maintain Adequate Substance in the UAE: Your business should have a significant presence in the UAE, including physical premises and employees.
2. Generate Qualifying Income: Your income should primarily come from compliant business activities conducted within the Free Zone or with international clients.
3. Do Not Elect to Be Part of Normal CT Rates: You should not choose to be taxed under the standard corporate tax rates applicable to non-Free Zone businesses.
4. Non-Qualifying Revenue Does Not Exceed the De Minimis Threshold Your non-qualifying income should be below 5% of total revenue or AED 5 million, whichever is lower.
5. Have Audited Financial Statements in Accordance with IFRS: You should maintain accurate financial records and have them audited in line with the International Financial Reporting Standards (IFRS).
6. Meet Any Other Specific Conditions Prescribed by the Free Zone Authority: You should comply with any additional requirements set by the respective Free Zone authority.
While the definition of a Free Zone is established, the Cabinet Decision listing the designated Free Zones is still pending. This means more clarity is awaited on the Free Zones eligible for corporate tax relief in the UAE. Until the decision is announced, you may contact the Free Zone authority to confirm whether your Free Zone is eligible for Corporate Tax relief.
What is Qualifying Activity?
As per Cabinet Decision No 265, business activities for Corporate Tax purposes can be divided into three categories: Qualifying activities, Excluded activities, and Other activities. Only qualifying activities are considered for the Free Zone Tax Relief.
Qualifying activities include:
- Manufacturing of goods or materials
- Processing of goods or materials
- Trading of Qualifying Commodities
- Holding of shares and other securities for investment purposes
- Ownership, management, and operation of Ships
- Reinsurance services
- Fund management services
- Wealth and investment management services
- Headquarter services to Related Parties
- Treasury and financing services to Related Parties
- Financing and leasing of Aircraft
- Distribution of goods or materials in or from a Designated Zone
- Logistics services
- Any activities that are ancillary to the above Qualifying Activities
The Cabinet Decision also outlines seven activities under Excluded Activities. Free Zone businesses involved in these activities may not be eligible for the 0% Tax rate benefits.
What is Qualifying Income? Qualifying Income refers to the income that is considered for 0% corporate tax relief in Free Zone entities across the UAE. The determination of qualifying income depends on the nature of transactions and the parties involved:
1. Transaction with Another Free Zone Person:
Income generated from transactions with another business entity within the same Free Zone can be considered as qualifying income.
2. Transaction with a Non-Free Zone Person:
Income from transactions with an entity outside the Free Zone may not be considered as qualifying income.
3. Income from All Other Transactions:
All other income, provided they satisfy the de minimis requirements, can be considered as qualifying income.
However, qualifying income does not include income generated from domestic (mainland) or foreign permanent establishments, immovable property outside the Free Zone, and certain other activities like income from non-commercial properties.
Understanding De Minimis Tax Rule
The De Minimis Rule is an important part of the new UAE Corporate Tax for Free Zone regulations. This rule states that if you are a QFZP and your non-qualifying income is less than 5% of the total revenue or less than AED 5 million, whichever is lower, you can still enjoy a 0% tax rate.
Example: - If your total revenue is AED 10 million and your non-qualifying income is AED 400,000 (4% of total revenue), your business can still benefit from the 0% tax rate because your non-qualifying income is below the 5% limit of the De Minimis requirements.
Certain types of income are not included in these calculations, such as revenue related to immovable property within the Free Zone and income from domestic or foreign permanent establishments.
Exclusions: - Revenue from immovable property within the Free Zone and income from Domestic or Foreign Permanent Establishments are excluded to ensure the 0% tax rate benefit is aimed at the operational income of Free Zone companies rather than passive income or revenue generated from a place of business located outside the Free Zone.
How Does Corporate Tax for Free Zone Impact Businesses?
The introduction of the UAE Corporate Tax for Free Zone has significant implications for businesses operating in these zones. If you are no longer eligible for a 0% tax rate, your financial growth could face significant challenges due to the additional tax burden. Therefore, it is crucial for businesses operating in the UAE to take every possible step to prevent unnecessary cash leakages.
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