A Qualifying Free Zone Person meets certain specified conditions as set out in the tax regulations to enjoy certain tax benefits (0% tax on qualifying income), as stipulated in the legislation.
Related terms such as Qualifying Income, De-minimis requirement, Qualifying and Excluded Activities, as released in Cabinet Decision No. 55 of 2023 and Ministerial Decision No. 139 of 2023 is also explained in this blog.
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Who is a Qualifying Free Zone Person?
A Free Zone Person that is a Qualifying Free Zone Person can benefit from a preferential Corporate Tax rate of 0% on their “Qualifying Income” only, if,
They maintain adequate substance in the UAE.
Derive a Qualifying Income
Not made an election to be subject to Corporate Tax
Compliance with transfer pricing requirements as laid down in the 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, they will be subject to the standard rates of Corporate Tax from the beginning of the Tax Period where they failed to meet the conditions.
What is Qualifying Income?
1. Income derived from transactions with other Free Zone Persons, where that Free Zone Person is the Beneficial Recipient of the relevant services or Goods.
A "Beneficial Recipient" shall mean a Person who has the right to use and enjoy the service or the Good and does not have a contractual or legal obligation to pass on such service or Good to another person.
2. Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities.
"Excluded Activities" are any activities conducted by a Qualifying Free Zone Person from which Non-Qualifying Income is derived.
3. Any other income provided that the Qualifying Free Zone Person satisfies the de minimis requirements.
"De Minimis Requirement" means the Non - Qualifying Revenue derived by the Qualified Free Zone Person does not exceed 5% of the total revenue or AED 5 million, whichever is lower.
"Non – Qualifying Income" is any revenue derived from any of the following:
- Excluded Activities
- Non – Qualifying Activities where the other party to the transaction is a Non-Free Zone Person.
"Total Revenue" is all qevenue derived by a Qualifying Free Zone Person in a Tax Period.
What are 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 that are subject to the regulatory oversight of the competent authority in the State.
Fund management services that are subject to the regulatory oversight of the competent authority in the State.
Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
Headquarter services to Related Parties.
Treasury and financing services to Related Parties.
Financing and leasing of Aircraft, including engines and rotatable components.
Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale.
Logistics services.
Any activities that are ancillary to the above activities.
What are Excluded Activities?
Free Zone Businesses involved in these activities may not be eligible for the same tax benefits or exemptions as those engaged in Qualifying Activities.
Banking activities that are subject to regulatory oversight.
Insurance activities that are subject to regulatory oversight.
Finance and leasing activities that are subject to regulatory oversight.
Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone
Ownership or exploitation of intellectual property assets.
Any transactions with natural persons, except (i) Ownership & management of ships, (ii) Fund management services, (iii) Wealth management Services, (iv) Financing & leasing of aircrafts.
Any activities that are ancillary to the activities listed above.
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