The UAE’s Federal Tax Authority (FTA) has introduced a comprehensive guide detailing how Corporate Tax regulations apply to businesses in the country’s free zones. This guide is an essential resource for thousands of companies operating within these zones.
Key Information for Free Zone Businesses
Published this month, the guide offers critical insights for businesses operating in UAE free zones. It clarifies the conditions that companies must meet to qualify for the 0 percent Corporate Tax rate on certain income streams, providing much-needed guidance on navigating the new tax landscape.
Definition of Qualifying Free Zone Person (QFZP)
Central to the new regulations is the concept of a “Qualifying Free Zone Person” (QFZP). A QFZP is a free zone business that meets specific requirements related to substance, reporting, and other criteria to be eligible for the 0 percent tax rate on “Qualifying Income” streams, such as manufacturing, trading, and services.
To achieve QFZP status, a free zone entity must:
Derive income solely from activities specified as “Qualifying” under the law.
Maintain adequate assets, employees, and operating expenditures proportionate to its activities.
Comply with transfer pricing rules.
Prepare audited financial statements.
Core Income-Generating Activities and Outsourcing
The guide specifies that a Free Zone Person must engage in core income-generating activities within the free zone to benefit from the 0 percent tax rate on Qualifying Income. For activities such as distribution, this must occur in a Designated Zone. For research and development (R&D) related to Qualifying Intellectual Property, core activities may be outsourced to entities within the UAE or to non-related parties outside the UAE, provided there is adequate supervision of the outsourced activities.
Tax Treatment of Different Income Streams
Income from foreign operations outside the UAE is generally exempt from Corporate Tax, while domestic operations outside the free zone are taxed at the standard rate of 9 percent. Companies that meet the QFZP criteria can apply the 0 percent tax rate to Qualifying Income streams and the 9 percent rate to non-qualifying income.
Detailed Guidance on Qualifying Activities
The 134-page document provides extensive details on the approved list of “Qualifying Activities,” including manufacturing, commodities trading, holding intellectual property or equities, and providing services like reinsurance. It outlines the criteria, scope, and potential ancillary activities for each category.
Specifics on Intellectual Property and Real Estate Income
The guide also covers the treatment of income streams from intellectual property and immovable property. For intellectual property, it includes formulas to calculate the portion of income eligible for the 0 percent rate based on related expenditure. Real estate income may qualify for the 0 percent rate if it is linked to commercial property within the free zone.
Essential Information for Free Zone Companies
With the UAE Corporate Tax now fully in effect after a grace period, this guide offers essential information for the numerous companies operating in the country’s free zones. It aims to provide clarity and support to businesses as they navigate the new tax regulations.
The full guide, titled “Corporate Tax Guide for Free Zone Persons,” is part of a series of guidance materials published by the FTA since the implementation of the UAE’s Federal Corporate Tax laws last year.
