Understanding the beneficial recipient rule in the UAE Free Zones

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The UAE Corporate Tax regulations allow Free Zone companies and branches to access a 0% Corporate Tax rate on certain qualifying activities and transactions when specific conditions are met. The 0% tax rate applies to transactions between Free Zone entities, provided these transactions do not involve excluded activities and the recipient meets the beneficial recipient criteria for the relevant services or goods.

What makes a free zone person a beneficial recipient?

Free Zone entities qualify as beneficial recipients of services or goods when they possess the right to use and benefit from these services or goods without being contractually or legally required to provide such services or goods to another party.

For beneficial recipient status, the services or goods must be utilised by the Free Zone entity itself, not by any Foreign Permanent Establishments or Domestic Permanent Establishments associated with that entity.

Where recipients function as conduits or intermediaries, including agents or nominees acting for third parties such as related parties or group entities, the actual beneficial recipient becomes the third party rather than the conduit or intermediary.

Consider how this rule operates in actual business scenarios. Company C operates a free zone legal services business, which is not considered a qualifying activity for 0% tax purposes. Company C enters into a contract with Company M, a non-Free Zone Person, to provide legal advice in Mandarin. While Company C has the legal expertise, it needs translation services to deliver the advice in Mandarin.

- Sameer Mishra is a senior journalist based in the UAE