Corporate Tax on Free Zone Persons: FTA Guide Offers More Clarity

Free Zone Persons who are Qualifying Persons are entitled to a 0% corporate tax rate on their Qualifying Income as per the UAE Corporate Tax Law. However, a 9% rate, which is the standard corporate tax rate in the UAE, will apply on taxable income that is not ‘Qualifying Income’.

Free Zone persons must understand the eligibility conditions to enjoy the 0% corporate tax rate in the UAE. The Federal Tax Authority (FTA) released a new guide providing more clarity that touches on the hot topic ‘how free zone businesses can get 0% corporate tax rate’ apart from explaining other relevant aspects.

Corporate tax consultants in Dubai can guide you further on the 0% preferential rate for free zone persons. Let us dive in to learn more about a summary of the key topics covered in the UAE Corporate Tax Guide on Free Zone Persons:

Substance-related Requirements

The guide offers more clarity on one of the key conditions to be treated as a qualifying free zone person under the UAE corporate tax regime.

A free zone person needs to maintain adequate substance, which means they must carry out income-generating activities for that business in the Free Zone/Designated Zone. The Free Zone Person must have adequate assets, full-time employees, and incur an adequate amount of operating expenditures in the Free Zone (or Designated Zone for distribution activities) to perform its core income-generating activities.

Beneficial Recipient Rule

The 0% corporate tax rate only applies to transactions where the recipient (Free Zone Person) is the Beneficial Recipient of the relevant services or Goods. A Free Zone Person will be treated as a Beneficial Recipient when it has the right to use and enjoy the services or goods without any contractual or legal obligation to supply such services or goods to another person. Moreover, the services or goods must be for use by the Free Zone parent and not by a Foreign Permanent Establishment or Domestic Permanent Establishment.

De minimis Requirements

A free zone person deriving an income that is outside the intended scope of the rules may lose its Qualifying Free Zone Status unless it meets the de minimis requirements. While assessing the de minimis requirements, revenue generated from the below sources won’t be considered and will not affect the Parson’s Qualifying Free Zone Person:

• Revenue attributable to a Foreign Permanent Establishment
• Revenue attributable to a Domestic Permanent Establishment
• Revenue from Immovable Property located in a Free Zone (other than Commercial Property located in a Free Zone when the income arises from a transaction with a Free Zone Person)
• Revenue from the ownership or exploitation of intellectual property (other than Qualifying Income from Qualifying Intellectual Property)

Immovable Property located in a Free Zone

An Immovable Property is a property that is settled and fixed in its space and cannot be moved without deteriorating it or modifying its shape.

The income derived by a Qualifying Free Zone Person from an immovable property located in a free zone will be treated in the following way:

• Income from transactions with a Free Zone Person (who is the Beneficial Recipient) in respect of Commercial Property located in a Free Zone is treated as Qualifying Income. Hence income from such transactions will not be treated as Taxable Income
• Income from transactions with a Free Zone Person (who is not the Beneficial Recipient) in respect of Commercial Property located in a Free Zone is not treated as Qualifying Income and will be treated as Taxable Income subject to a 9% Corporate Tax rate. This will be disregarded for the purposes of calculating total Revenue and non-qualifying Revenue for the de minimis requirement
• Income from other Immovable Property located in a Free Zone is not treated as Qualifying Income. Hence such income will be treated as Taxable Income and will be disregarded for the purposes of calculating total Revenue and non-qualifying Revenue for the de minimis requirement

Immovable Property Outside a Free Zone

The ownership or exploitation of Immovable Property located outside of a Free Zone will be treated as an Excluded Activity under the UAE corporate tax regime.

Qualifying Intellectual Property

A Qualifying Free Zone Person can enjoy a 0% corporate tax rate on income derived from Qualifying Intellectual Property if there is a direct nexus between the income derived from the Qualifying Intellectual Property and the Qualifying Expenditures that the QFZP incurs to generate that income. It means the 0% rate would not apply to income from Qualifying Intellectual Property that the QFZP acquires from a third party.

Qualifying Activities

When a Qualifying Free Zone Person sells its services or goods to other free zone persons who are beneficial recipients, the Qualifying Free Zone Person can enjoy a 0% corporate tax rate on the income derived from such transactions.

If the transaction is with a Non-Free Zone Person, the Qualifying Free Zone can benefit from the 0% Corporate Tax if it derives Qualifying Income from transactions in respect of the following Qualifying Activities:

• 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
• Headquarters 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

Losing Status of Qualifying Free Zone Person

An entity will lose its Qualifying Free Zone Person status under the following circumstances:

• If it elects to be subject to the standard Corporate Tax rules and rates
• If it fails to meet the criteria to be a Qualifying Free Zone Person from the beginning of the Tax Period for which it elects to be subject to Corporate Tax or in which it fails to meet the criteria to be a Qualifying Free Zone Person, and the four subsequent Tax Periods

Election not to be a Qualifying Free Zone Person

A free zone person can make an election not to be treated as a Qualifying Free Zone Person. The guide also mentions the period for making such an election. Such an election can be made effective from either of:

• The commencement of the Tax Period in which the election is made, or
• The commencement of the Tax Period following the Tax Period in which the election was made

Simplify UAE Corporate Tax Compliance with Tax Gian

The FTA’s Corporate Tax Guide for Free Zone Persons provides essential guidance on critical aspects of the UAE corporate tax. However, it is advisable to hire the best corporate tax advisers in Dubai such as Tax Gian to make the best use of the guidance.

Tax Gian is a brand of Jitendra Tax Consultants (JTC), which is one of the best tax agents in the UAE registered with the FTA. JTC and its associate Jitendra Chartered Accountants (JCA) have been providing exemplary accounting and tax advisory services in Dubai for more than two decades. Consult with Tax Gian’s tax experts to navigate the challenges of the UAE corporate tax regime