The UAE promised a business-friendly tax system, so why are some Free Zone companies still getting taxed? What does the government mean by ‘qualifying income’? And how can you make sure your revenue fits the definition?
Due to the frequently changing taxation system in the United Arab Emirates (UAE), it becomes difficult for businesses to stay informed on latest updates, therefore they opt for Corporate Tax Advisory services from best accountants in Dubai. We at Sidra Salman & Co. Have an expert team of tax consultants who are there to guide you through the intricacies of Corporate Tax. In this blog, we walk you through the concept of qualifying income in UAE Corporate Tax for businesses operating in freezones.
Corporate Tax in UAE Free Zones
Corporate Tax has been implemented in the UAE from the 1st of June which stands at 9% as announced by the Ministry of Finance and the Federal Tax Authority (FTA). UAE has, however, introduced a completely new set of corporate tax rules for UAE Free Zones. The UAE government has introduced the concept of “Qualifying Income” under the corporate tax framework, which will be used to determine the tax liability for businesses.
Free Zone Business can benefit from 0% corporate tax. However, they must qualify to become a Qualifying free zone person. To qualify as a Qualifying free zone person (QFZP), it is important to fulfill different conditions from the federal decree law of corporate tax wherein one must have revenue falling under Qualifying income.
Briefly, a 0% corporate tax is imposed for Qualifying free zone person (QFZP) when one ought to have revenue falling under Qualifying income regulations of CT law. The businesses that do not meet the criteria for Qualifying Income are usually subject to the 9% corporate tax rate and will not be considered a Qualifying Free Zone Person. Businesses are advised to seek consultancy services from Corporate Tax Advisors to avoid any mistakes while making decisions.
What is Qualifying and Non-Qualifying Income?
Qualifying income refers to the revenue earned through operations that constitute business purpose in a free zone. Such a type of income tends to be exempt from tax. This applies to certain types of business operations, which receive the income subject to the 0% rate on corporate taxes. These businesses normally include operations pertaining to foreign trade or special service activities that extend beyond the mainland of UAE.
Non-qualifying income is income gained from activities not deemed to fall within the purpose of the free zone’s business. This sort of income may be subject to taxes. This income is usually derived from activities that do not fall under the criteria of qualifying income and is taxed at a standard corporate rate of 9%. These activities may include banking, insurance, or local extraction of sources meant to serve chiefly the UAE market.
Types of qualifying income activities in the UAE
- Income from commercial property inside a free zone (property devoted exclusively to businesses)
- Income from other freezone persons apart from revenues from activities which are not allowed.
- Income from non-free zones persons from qualifying activities which are not excluded activities
- Non-qualifying income that meets de minimis requirements (5% or 5 million whichever is lower)
Qualifying income criteria for Qualifying Free Zone Persons QFZP’s
According to Cabinet Decision No. 55 of 2023, the following criteria define the qualifying income for a Qualifying Free Zone Person. This comprises income relating to transactions made with other Free Zone Persons except income from disqualified activities (activities evaluated by a decision announced by the Minister and carried out by the Qualifying Free Zone individual, from where non-Qualifying Income comes). It also covers income from dealings with a Non-Free Zone person, but only where it relates to qualifying activities and not excluded activities. Other income can also qualify where the Qualifying Free Zone person meets the De Minimis requirements (see below to learn about De Minimis). Income will be considered as derived from transactions with a Free Zone Person when the Free Zone Person is the beneficial recipient of the relevant goods or services.
Beneficial recipient requirements
To be recognized as a beneficial recipient of qualifying income, an entity must meet specific criteria beyond just earning revenue.
- The business must carry out its main income-generating activities within a Free Zone.
- The QFZP should have the right level of assets and qualified personnel in place, appropriate for the scale and type of work being done.
- Operating costs should be in line with the nature and size of the business; this shows real economic presence.
- The QFZP is required to maintain audited financial statements under the corporate tax law. It helps prove compliance and confirm that the income meets the qualifying criteria under the CTL.
Qualifying Income for Domestic or Foreign Permanent Establishment
If a Qualifying Free Zone Person has a Domestic or Foreign Permanent Establishment, any income generated through that establishment will be considered taxable income and subject to the standard corporate tax rate.
In this case, the income is treated as if it belongs to a separate and independent entity that is related to the Qualifying Free Zone Person. This approach helps ensure that the tax obligations tied to domestic or foreign operations are clearly separated from qualifying Free Zone income. To avoid missteps and ensure proper structuring, it’s worth seeking corporate tax advisory services or engaging with the best accountants in Dubai who understand how these rules play out in real-world business scenarios.
Qualifying Income for Immovable Property located in a Free Zone
Income derived from immovable property located in a Free Zone, resulting from certain transactions, will be considered taxable income and subject to taxation. This includes:
- Transactions with Non-Free Zone Persons related to commercial property.
- Transactions with any individual related to immovable property that is not classified as commercial property.
For both of these types of transactions, the taxable income for the relevant tax period will be the income payable to the immovable property, calculated in accordance with the provisions of the Corporate Tax Law.
What is the De minimis Requirements?
The De Minimis requirements are considered fulfilled when the non-qualifying revenue earned by the Qualifying Free Zone Person in a tax period does not exceed the total revenue percentage of the Qualifying Free Zone Person for that same period, or the amount specified by the Minister, whichever is lower.
The following types of revenue will not be included when calculating non-qualifying revenue and total revenue:
- Revenue payable to immovable property in a Free Zone resulting from:
- Transactions with Non-Free Zone Persons related to commercial property.
- Transactions with any person related to immovable property that is not commercial property.
- Revenue payable to a Domestic or Foreign Permanent Establishment of the Qualifying Free Zone Person.
Non-qualifying revenue in a tax period includes income derived from:
- Excluded activities.
- Activities that are not considered qualifying activities, where the other party involved is a Non-Free Zone Person.
Total Revenue refers to all revenue earned by a Qualifying Free Zone Person within a tax period.
It’s important to note that a Qualifying Free Zone Person and its Domestic or Foreign Permanent Establishment will be treated as separate entities and independent persons, though related parties to the Qualifying Free Zone Person.
Stay Compliant
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