Under the United Arab Emirates (UAE) Corporate Tax (CT) Regime there is an option for a legal entity to become a Qualifying Free Zone person and benefit from a preferential 0% CT rate on its Qualifying Income if they meet the following conditions:
- Maintaining sufficient substance in the free zone
The entity must have sufficient physical presence, personnel, and operations within the Free Zone.
- Generating qualifying income
The income must fall under categories defined as qualifying by the UAE CT regime (please see details below).
- Not opting to be subject to corporate tax
The entity must not have chosen to be taxed under the standard corporate tax regime.
- Adhering to the Arm’s Length Principle and keep proper transfer pricing documentation
Transactions between related parties must be conducted at market value, and appropriate transfer pricing documentation must be maintained.
- Ensuring that non-qualifying revenues do not exceed the de minimis threshold
Non-qualifying income must remain within the prescribed minimal thresholds (non-qualifying revenue can be maximum 5% of the total or AED 5,000,000, whichever is lower).
- Preparing audited financial statements in compliance with legal requirements
Financial statements must be audited and prepared in accordance with the law.
- Fulfilling any additional conditions that may be set by the Minister
The entity must comply with any other conditions that may be set by the UAE Minister of Finance.
What does Qualifying Income mean?
Most of the criteria points in becoming a Qualifying Free Zone Person are clear and straightforward, but it is important to understand what Qualifying Income means and in which relation can it be applied.
According to the Cabinet Decision No. 100 of 2023 the Qualifying Income shall include the following categories:
- Income from transactions with other Free Zone Person, except for income derived from Excluded Activities
Any transactions, if they are concluded with other Free Zone Person, but not the Excluded Activities, as e.g. banking, insurance, finance and leasing and most of transactions made with natural persons.
- Free Zone Person is the Beneficial Recipient
The income will be considered as derived from transactions with a Free Zone Person where that Free Zone Person is the Beneficial Recipient i.e. the final user of the relevant services or Goods.
- Income from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities
Qualifying activities can be e.g. manufacturing of goods and materials, fund management, wealth and investment management etc. as described in Ministerial Decision No. (265) of 2023.
All of the above-mentioned criteria should be met from the first day of the financial year so precise planning and pre-assessment is essential.