The concept of Qualifying Income, meticulously designed for Qualifying Free Zone Persons (QFZPs), is intricately defined in Article 18 of the UAE Corporate Tax Law (CTL)[1]This article is to explore the recent UAE Ministry of Finance decisions that redefine Qualifying Income and Activities for Qualified Free Zone Persons (QFZPs). The purpose of writing is to gain insights into the comprehensive guidelines for Free Zone taxation, encompassing Qualifying and Excluded Activities, de minimis thresholds, and their impact on businesses’ tax status.” For detail contact Tax Consultant Dubai.
Qualifying Income: Defining the Essence
At the heart of the Free Zone Corporate Tax regime lies the notion of Qualifying Income. This focal point encapsulates revenue streams that meet the stipulated criteria, thereby granting entities preferential tax treatment. Qualifying income signifies the revenue generated by a Qualified Free Zone Person (QFZP) through transactions involving businesses outside the UAE, within the same free zone, or in any other UAE free zone. Any non-passive income originating from the UAE mainland will be subject to the standard tax rates, while the remaining income will enjoy a favorable 0% tax rate. Passive income generated from activities such as share ownership, royalties, or capital gains from investments in mainland companies will also benefit from the 0% tax rate.
The following sections elucidate the fundamental aspects of Qualifying Income and its constituents.
Categories of Qualifying Income for QFZPs
Article 18 of the Corporate Tax Law (CTL) expounds upon the categories of Qualifying Income applicable to Qualified Free Zone Persons (QFZPs). These categories serve as the linchpin for determining tax benefits for entities operating within Free Zones.
- Transaction with Non-Free Zone Persons: This category encompasses income derived from transactions with Non-Free Zone Persons, given that these transactions relate to Qualifying Activities not included in the Excluded Activities roster.
- Other Income: This category extends to any other income not covered by the previous category. However, this income can enjoy preferential tax treatment only if the QFZP fulfills the De Minimis Requirements, as elaborated further.
Qualifying Activities: The Backbone of Preferential Tax Treatment
QFZPs engaging in Qualifying Activities stand to reap the benefits of the Free Zone Corporate Tax regime. These activities encompass a diverse spectrum, ensuring that a wide array of business endeavors can access favorable tax treatment.
The following are Qualifying Activities as stated:
- Goods and Materials Processing and Manufacturing
- Securities and shares holding
- Ships Operation, Management & Ownership
- Reinsurance services, regulated by the UAE’s competent authority.
- Fund management services, regulated by the UAE’s competent authority.
- Services related to Investment Management and Wealth Planning regulated by UAE’s competent authority.
- Related Parties Headquarter Services
- Related Parties Financing and Treasury Services
- Aircraft Leasing, Financing, Engine and Components
- Goods and Material Distribution, Resale and Processing from Specific Zone to customers
- Logistics services.
- Activities ancillary to the listed activities.
Excluded Activities: The Bounds of Qualification
Certain activities lie beyond the purview of Qualifying Activities, falling under the umbrella of Excluded Activities. These activities, despite their non-qualification, play a crucial role in demarcating the boundaries of preferential tax treatment. Excluded Activities comprise the following:
- Transactions with natural persons, except for Qualifying Activities listed above.
- Banking activities
- Insurance activities are regulated by the UAE’s competent authority, excluding reinsurance services.
- Finance and leasing activities are regulated by the UAE’s competent authority, excluding those listed above.
- Disposition and Ownership of immovable property, and commercial property transactions with other Free Zone Persons are not included.
- Intellectual Property Ownership or exploitation of assets.
- Activities are ancillary to the listed qualified activities.
De Minimis Requirements: The Pillar of Thresholds
The De Minimis Requirements serve as a safeguard, ensuring the integrity of the Qualifying Income criteria. These requirements act as thresholds that entities must meet to maintain eligibility for the Free Zone Corporate Tax regime.
- Non-Qualifying Revenue Threshold: Non-Qualifying Revenue, referring to income derived from Excluded Activities or transactions with Non-Free Zone Persons that don’t align with Qualifying Activities, must not exceed 5% of the QFZP’s total revenue for a specific tax period.
- Monetary Limit Threshold: Non-Qualifying Revenue must remain below AED 5,000,000 (approximately USD 1.4 million) for the same tax period.
Significance of De Minimis Requirements: –
Compliance with the De Minimis Requirements emerges as a pivotal factor for QFZPs seeking to retain their eligibility for preferential tax treatment. Ensuring adherence to these requirements safeguards the tax advantages that underpin the Free Zone Corporate Tax regime.
Consequences of Non-Compliance: –
Falling short of the stipulated thresholds or other qualification criteria carries significant consequences. Entities that fail to meet these criteria forfeit their preferential tax status not only for the current tax period but also for the subsequent four tax periods. This underscores the critical importance of stringent adherence to the qualification criteria to sustain the benefits of preferential tax treatment.
Additional Requirements: The Roadmap to Qualification
Apart from the aforementioned components, several other conditions must be satisfied for an entity to attain recognition as a QFZP. These additional prerequisites ensure that entities genuinely align with the spirit of the Free Zone Corporate Tax regime.
- Conducting Core Activities in a Free Zone: Entities must perform their core income-generating activities within a Free Zone. These activities should be supplemented by adequate assets, qualified employees, and operating expenditures.
- Audited Financial Statements: QFZPs are required to prepare audited financial statements that adhere to the guidelines set forth by the Minister under the CTL.
Harnessing Benefits Through Compliance:
The Path Forward the Free Zone Corporate Tax regime in the UAE extends a multitude of enticing tax incentives. However, these benefits are intricately tied to strict compliance with the outlined conditions.
In conclusion, the concept of Qualifying Income for Free Zone Persons stands as a cornerstone of the UAE’s Free Zone Corporate Tax regime. Article 18 of the Corporate Tax Law (CTL) intricately defines the components that constitute Qualifying Income, while delineating Qualifying Activities, Excluded Activities, De Minimis Requirements, and other essential criteria. This framework provides a comprehensive roadmap for entities to navigate the intricate landscape of preferential tax treatment within Free Zones.
Arman Ali, respects both business and technology. He enjoys writing about new business and technical developments. He has previously written content for numerous SaaS and IT organizations. He also enjoys reading about emerging technical trends and advances.
