Corporate tax applicability to Free Zone Persons
A Qualifying Free Zone Person is eligible for a 0% Corporate Tax rate on its Qualifying Income.
In order to be considered as a Qualifying Free Zone Person, a Free Zone Person must meet the following requirements:
- derive Qualifying Income from relevant transactions;
- maintain adequate substance in the UAE;
- satisfy the de minimis requirement;
- have not elected to be subject to Corporate Tax;
- comply with the transfer pricing rules and documentation requirements under the Corporate Tax Law; and
- prepare and maintain audited Financial Statements for the purposes of the Corporate Tax Law.
Qualifying Free Zone Persons are not entitled to a 0% rate on their first AED 375,000 of Taxable Income. Therefore, any Taxable Income that is not Qualifying Income will be taxed at the general rate of 9%.
Qualifying Income includes:
- Income derived from transactions with other Free Zone Persons, except for income derived from Excluded Activities;
- Income derived from transactions with any Non-Free Zone Person, domestic and foreign, only in the case of Qualifying Activities that are not Excluded Activities; and
- Any other income where the de minimis requirement is satisfied.
Qualifying Income does not include income derived from Excluded Activities.
Excluded Activities include:
- Transactions with natural persons, except in relation to certain Qualifying Activities;
- Banking, insurance, finance and leasing activities that are subject to the relevant regulatory oversight of the relevant competent authority in the UAE, except for certain exceptions;
- Ownership or exploitation of UAE immovable property, other than Commercial Property located in a Free Zone provided such activity in relation to Immovable Property located in a Free Zone is conducted with other Free Zone Persons;
- Ownership or exploitation of intellectual property assets; and
- Activities that are ancillary (which serve no independent function) to the above activities.
Qualifying Income includes income derived from transactions with Non-Free Zone Persons only in respect of Qualifying Activities. These activities include:
- Manufacturing of goods or materials;
- Processing of goods or materials;
- Holding of shares and other securities;
- Ownership, management and operation of Ships;
- Reinsurance services subject to the regulatory oversight of the relevant competent authority in the UAE;
- Fund management services subject to the regulatory oversight by the relevant competent authority in the UAE;
- Wealth and investment management services subject to the regulatory oversight by the relevant competent authority in the UAE;
- Headquarter services to Related Parties;
- Treasury and financing services to Related Parties;
- Financing and leasing of Aircraft, including engines and rotable components;
- 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;
- Logistics services; and
- Any ancillary activities (which serve no independent function) to the above activities.
Adequate substance requirements
To meet the adequate substance requirements, a Free Zone Person must have their core-income generating activities performed within the Free Zone (these can be undertaken by the Free Zone Person or outsourced to a Related Party or third party who is located in a Free Zone.)
As businesses vary, ‘adequate substance’ is determined on a case-by-case basis, following the test criteria. This may include:
- the number of qualified full-time employees,
- adequate operating expenditure and
- physical assets.
The de minimis requirement
For a Free Zone Person to be a Qualifying Free Zone Person, the de minimis requirements must be met.
The de minimis requirements are met where the non-qualifying Revenue in a Tax Period does not exceed the lower of:
- AED 5,000,000; and
- 5% of total Revenue (calculated as total amount of non-qualifying Revenue total Revenue).
Election to be taxed at the general rates of Corporate Tax
A Qualifying Free Zone Person can elect to be taxed at the general rates of Corporate Tax. The election will be effective from either the commencement of the Tax Period in which the election is made, or the commencement of the following Tax Period and for the following four Tax Periods, after which the election can be made again.
In addition, if a Qualifying Free Zone Person fails to meet any of the conditions above at any particular time during a Tax Period, it will cease to be eligible for the 0% Corporate Tax rate from the beginning of that Tax Period and will be taxed at the general rates of Corporate Tax for five Tax Periods starting with the Tax Period in which the conditions have not been met.