Freezone and Corporate Tax Implications in UAE

The corporate tax implication on Free Zone Persons is different from that of a juridical person or an individual in UAE. As per the Corporate Tax regime, the 0% Corporate Tax will be applicable on qualifying income, while a 9% Corporate tax will be applicable on the taxable income that does not qualify as the qualifying income for Qualifying Free Zone Persons.

So let’s understand the terms “Free Zone Persons” and “Qualifying Income”

1. Who are treated as free-zone persons?

Every person who is conducting business in a Free Zone is automatically a Free Zone person. However, in order to be a qualified Free Zone Person, all the conditions below must be met.

Even if one condition is not met, then the Free Zone Person will not qualify Free Zone Person.

Conditions:-

1. The entity must have and maintain sufficient substance in the UAE. This means he is carrying out business activities in the jurisdiction of the UAE instead o only registering for tax-related reasons.

2. He is earning “Qualifying Income” that will be specified by the Cabinet Decision.

3. He complies with transfer pricing rules and maintains the related transfer pricing documentation.

4. He has not elected to pay the corporate tax in full. The Minister may prescribe additional conditions that a Qualifying Free Zone Person must meet

2 .Qualifying Income

For the purposes of the application of Article 18 of the Corporate Tax Law, the following will be treated as Qualifying Income of a Qualified Free Zone Person (QFZP)

• Income derived from transactions with other Free Zone Persons, except for income derived from “excluded activities”

• Income derived from transactions with a Non-Free Zone Person, but only in respect of “qualifying activities” that are not Excluded Activities; and

• Any other income provided that the QFZP satisfies the specified “de minimis requirements“

Qualifying Activities:

The following activities conducted by a QFZP shall be considered Qualifying Activities:

1. manufacturing of goods or materials;

2. processing of goods or materials;

3. holding of shares and other securities;

4. ownership, management and operation of ships;

5. reinsurance services that are subject to the regulatory oversight of the competent authority in the UAE;

6. fund management services that are subject to the regulatory oversight of the competent authority in the UAE;

7. wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE;

8. headquarter services to related parties;

9. treasury and financing services to related parties;

10. financing and leasing of aircraft, including engines and rotatable components;

11. 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;

12. logistics services; and

13. any activities that are ancillary to the activities listed in paragraphs (a) to (l) of the above.

Excluded Activities

The following activities shall be considered Excluded Activities:

1. any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) of the above section;

2. banking activities that are subject to the regulatory oversight of the competent authority in the UAE;

3. Insurance activities that are subject to the regulatory oversight of the competent authority in the UAE, other than the activity specified under paragraph (e) of the above section;

4. Finance and leasing activities that are subject to the regulatory oversight of the competent authority in the UAE, other than those specified under paragraphs (i) and (j) of the above section;

5. Ownership or exploitation of immovable property, other than commercial property located in a Free Zone where the transaction in respect of such commercial property is conducted with other Free Zone Persons;

6. Ownership or exploitation of intellectual property assets; and

7. any activities that are ancillary to the activities listed in paragraphs (a) to (f) above.

De Minimis Requirements

Non-qualifying revenue is revenue derived in a tax period from any of the following:

1. Excluded Activities; or

2. activities that are not Qualifying Activities where the other party to the transaction is a Non-Free Zone Person.

The De Minimis Requirements shall be considered satisfied where:

• the Non-Qualifying Revenue derived by the QFZP in a tax period does not exceed 5% (five percent) of the total revenue of the QFZP in that tax period; or

• AED 5,000,000 (approximately USD 1.4 million),

whichever is lower.

Where:

• the De Minimis Requirements threshold is exceeded;

• the QFZP does not satisfy the eligibility conditions of Article 18 of the CTL; or

• the QFZP does not satisfy any other conditions prescribed by the Minister,

then the Free Zone Person will not be eligible to be treated as a QFZP from the beginning of the relevant tax period and the subsequent four tax periods.

Written By CA Adarsh Janardhanan ACA

Expandx Tax Consultants