UAE Corporate Tax: ‘Qualifying income’ at 0% revealed for free zone businesses

Ministry issues rules on which activities get 0% corporate tax for free zone businesses

Last updated: June 01, 2023 | 14:27

Manoj Nair, Business Editor

3 MIN READ

The introduction of corporate tax at a headline rate of 9 per cent is one of the lowest globally.

Vijith Pulikkal/Gulf News

Dubai: The UAE Ministry of Finance has issued guidelines related to ‘qualifying income’ and what free zone based businesses can expect under the new corporate tax rule.

As was widely anticipated, these businesses will have 0 per cent corporate tax applied on ‘all activities’ related to transactions with other free zone entities, whether that’s renting commercial property, professional services, distribution, etc.

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When the UAE announced its corporate tax plans, free zone based businesses came under the 0 per cent tax regime. But for those with outside of free zone operations, the tax would cover such activities.

Thus, they can freely transact with other free zone based enterprises anywhere in the country. For the thousands of companies registered and based in free zones, the latest announcements are of vital import.

In one such clarification, the Ministry says that ‘to keep the free zone corporate tax regime simple and easy to comply with, there is no requirement to determine or verify whether the other free zone person is a ‘qualifying’ entity.

What makes up ‘qualifying income’?

According to the Ministry, this would include:

Income derived from transactions with other free zone Persons, except for income from ‘excluded activities”.

Income derived from transactions with any person - domestic and foreign - in the case of “qualifying activities’, except for income from excluded activities.

Plus, there is the ‘de-minimis’

There are also instances where a qualifying free zone entity can earn a small or incidental amount of non-qualifying income – but without being charged under corporate tax. Known as the ‘de-minimis’ threshold, it must not exceed the lower of Dh5 million or 5 per cent of total revenues. (De-minimis in tax parlance relates to amounts deemed small or marginal.)

What are the ‘qualifying activities’ for free zone business?

The free zone corporate tax coverage applies only to income derived from activities ‘performed exclusively in or from within such an entity.

“This is reflected in the definition of 'qualifying income', which includes income derived from transactions with other free zone persons as well as domestic and foreign sourced income from conducting any of the 'qualifying activities',” according to the Ministry.

These 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;

Fund management services that are subject to the regulatory oversight of the competent authority in the UAE;

Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE.

Headquarter services to related parties;

Treasury and financing services to related parties;

Financing and leasing of aircraft,

Logistics services;

Distribution in or from a designated zone that meets the relevant conditions; and any activities that are ancillary to the above-mentioned activities.

‘Excluded activities’

Income from certain specific 'excluded activities' will not be treated as 'qualifying income' regardless of whether the income is derived from a free zone entity or as part of undertaking a 'qualifying activity'.

This includes:

Income derived from transactions with individuals;

Income derived from certain regulated financial services activities;

Income derived from intangible assets;

Income derived from immovable property, other than transactions with free zone enterprises in relation to commercial immovable property located in a free zone.

Earning income from 'excluded activities' or earning any other income that is not 'qualifying income' will disqualify the free zone person from the regime.

What free zone businesses must keep tabs on

Revenue attributable to a domestic or foreign permanent establishment of the free zone business and revenues attributable to immovable property in a free zone that cannot benefit from the free zone corporate tax regime will not count towards the de-minimis threshold. Instead, the associated taxable income will be subject to the regular UAE corporate tax at 9%. Where the de-minimis requirements are not met or the free zone entity does not continue to meet any of the other qualifying conditions, the business will no longer be able to benefit from the 0% free zone corporate tax regime for a minimum period of five years. During this period, the business will be treated as an ‘ordinary taxable person’ and subject to tax at 9% on taxable income above Dh375,000.

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