Corporate Tax has come into effect in the UAE from the 1st of June which is at 9% as declared by the Federal Tax Authority (FTA) and the Ministry of Finance. However, UAE has issued a whole different set of corporate tax regulations for UAE Free Zones. The Government has issued a term Qualifying income under UAE corporate tax from which the tax liability will be calculated.
This session discusses the Corporate Tax in the Free Zones and the Qualifying Income for Free Zone individuals.
Corporate Tax in Free Zones and Qualifying Income
Free Zone Businesses can enjoy 0% corporate tax. However, one should meet the criteria to become a qualifying free zone person. To be a Qualifying free zone person (QFZP), one have to meet various conditions from the federal decree law of corporate tax under which one should have revenue that comes under Qualifying income.
In short, A 0% corporate tax is applied for Qualifying free zone person (QFZP) when one should have revenue that comes under Qualifying income regulations of CT law. One who doesn't meet the conditions of the Qualifying income shall be liable to the 9% corporate tax and not be considered a qualifying free zone person.
What is Qualifying Income?
Any income derived by a Qualifying Free Zone Person that is subject to a 0% Corporate Tax Rate is Qualifying Income. The Qualifying Income is derived/determined by qualifying business activity or transaction conducted within the Qualifying Free Zone.
Criteria to Determine Qualifying Income
According to the Cabinet Decision No. 55 of 2023, The following criteria determine the qualifying income for the qualifying free zone person.
- Income from transactions with other Free Zone Persons, except for income from the excluded activities (activities assessed by a decision declared by the Minister, conducted by the qualifying free zone individual from which a non-Qualifying Income is derived)
- Income from transactions with a Non-free zone individual, but only with respect to qualifying activities that are not excluded activities
- Other income whereby the Qualifying Free Zone individual fulfills the De Minimis requirements. (Read below to know about De Minimis)
- The income will be considered as derived from transactions with a Free Zone Person where that Free Zone Person is the Beneficial Recipient of the relevant services or Goods.
Who is a Beneficial Recipient?
A beneficial Recipient is 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 (Tangible or intangible) to another person.
- You need to determine whether the Qualifying Free Zone Person has a domestic Permanent Establishment. In such case, a “Non-Resident Person” can be considered a “Qualifying Free Zone Person”.
Qualifying Income for Domestic or Foreign Permanent Establishment
- The Payable Income to a Domestic Permanent Establishment or a foreign Permanent Establishment of a Qualifying Free Zone individual would be considered Taxable Income and taxed at 9% of corporate Tax for the free zone business.
- If a Qualifying Free Zone Person has a Domestic or a foreign permanent establishment and is earning for a tax period, then the taxable income it makes during a specific period of time will be treated as if it belongs to a separate and independent person who is related to qualifying free zone person.
Qualifying Income for Immovable Property located in a Free Zone
The Income Payable to an immovable property located in a Free Zone obtained from these transactions would be considered Taxable Income and taxed:
- Transactions with Non-Free Zone Person with respect to Commercial Property
- Transactions with any individual with respect to immovable property but not a Commercial Property
The Taxable Income of these two transactions for a specific tax period would be the income payable to the immovable property calculated on the basis of the relevant provisions of the Corporate Tax Law.
What are the De minimis Requirements?
The De minimis requirements are considered to be fulfilled when the non-qualifying Revenue obtained by the Qualifying Free Zone Person in a tax period does not exceed the total Revenue Percentage of the Qualifying Free Zone Person in that tax period, or the amount specified by the Minister, whichever is lower.
- The following Revenue would not be included while calculating non-qualifying Revenue and Total revenue:
a. Revenue payable to immovable property in a Free Zone obtained from the following transactions:
- Transactions with Non-Free Zone Persons in Terms of Commercial Property
- Transactions with a Person relating to immovable property which is not a Commercial Property
b. Revenue payable to a Domestic or a Foreign Permanent Establishment of the Qualifying Free Zone Person
- Non-Qualifying Revenue is obtained in a Tax Period from any of the following:
- Excluded activities
- Activities that are not Qualifying Activities, whereby the other party is a Non-Free Zone Person
Total Revenue is all Revenue obtained by a Qualifying Free Zone Person in a Tax Period.
A Qualifying Free Zone Person and its Domestic or Foreign Permanent Establishment would be treated as a separate entity and independent Person who is a Related Party to the qualifying Free Zone Person.
Corporate Tax Services for Free Zones
BMS Auditing is the pioneer in tax consulting and has extensive knowledge of Corporate Tax Law. The team serves you with relevant updates on Corporate Tax in Free Zones and the Qualifying Income of the Free Zone Person.
We have FTA Approved Corporate Tax consultants in UAE to offer an all-in-one corporate tax solution for Free Zones by Determining the qualifying income and complying with regulations to be eligible as a qualifying free zone person to subject the 0% corporate tax in UAE.
Our corporate Tax Services include,
- Corporate Tax Assessment
- Corporate Tax Registration
- Corporate Tax Return Filing
- Corporate Tax Accounting
- Corporate Tax Audit
- Corporate Tax Compliance
- Corporate Tax Advisory
Have queries on Corporate Tax in the Free Zone? Call BMS for assistance.