Let's Talk
Free Consultation
Table of Contents
Add a header to begin generating the table of contents
The UAE has taken a giant leap in its business landscape with the introduction of corporate tax. It aligns with global minimum taxation standards. As per the corporate tax regulations in UAE, a Qualifying Free Zone Person (QFZP) is recognised as a company (also refers to an entity) that operates within a free zone. As per the governing law and regulations, that company has to be maintaining its status of tax exemption, limited to the income generated by conducting business operations in free zones.
Understanding free zone business benefits
The entrepreneurs and investors in UAE can leverage exceptional business benefits of operating in UAE free zones. Currently, it boasts over 40 multidisciplinary free zones in which entrepreneurs can have full ownership of their company and 100% repatriation of capital and profits. Each free zone is characterized by world-class infrastructure and other distinct services related to smoother business setup and workflows.
Here’s the list of the most common benefits of UAE free zones
- Easy business setup process
- Faster licensing and approvals
- Vast business networking communities
- 100% corporate and personal income tax exemption
- 100% custom duty exemption
- Accessibility to domestic and international markets
Though UAE free zone regulations offer several benefits to entrepreneurs in the country, navigating the complexities is still critical to ensure tax compliance.
Determining a Qualifying Free Zone Person (QFZP)
A free zone person in the UAE is referred to an entity that establishes and operates within a designated free zone. However, to be recognised as a QFZP, that entity must adhere to a specific criteria and follow the regulations laid by the UAE authorities.
- Registered by a UAE free zone authority: The business entity must be registered with a relevant free zone authority within the UAE and maintain a significant presence in the country.
- Participation in qualifying activities and earning qualifying income, as defined by the CT law.
- Comply with UAE’s transfer pricing regulations to prevent tax evasion or manipulation through intra-company transactions.
Substance Requirement for a Free Zone Person
In order to qualify for zero percent corporate tax on income, a free zone person must have an adequate substance requirement. They have to meet certain specific criteria to perform commercial activities such as possessing assets, recruiting staff and operating in the designated free zone.
- Core Value-Creating Activities: These are the business activities that a free zone person i.e. an entity or enterprise undertakes for revenue generation in the designated free zone. The entity may also outsource its main value-added activities or services to generate more revenue and ultimately contribute to the free zone’s overall income.
- Outsourcing and Supervision: An entity operating in the free zone can collaborate or enter into a contract with any person in the UAE or other country to carry out business activities or research and development (R&D) related activities to generate qualifying intellectual property. It has to be within an extent that provides sufficient control to the entity over the outsourced activity.
Understanding Qualifying Income
As a QFZP, the business entity can leverage several benefits on the income earned from qualifying business activities. The UAE corporate tax law specifies the following criteria for qualifying income:
- Transactions with other free zone persons i.e. the income earned by a business from transactions conducted with other Free Zone entities. This excludes any income generated from activities designated by the Minister as ‘excluded activities.’
- Transactions with non-free zone persons i.e. the income generated by an enterprise as a result of transactions with mainland companies can also qualify. However, the activities must meet the rules and are not classified as excluded activities.
- De Minimis requirements: De Minimis rule refers to the permissible limit of income that a business can generate from non-qualifying activities even as a QFZP. While some income might be allowed, but it cannot make a significant portion of the business operations. The thresholds and calculations on such incomes in de minimis are established by the relevant authorities.
Hence, for the beneficial recipient, it is imperative to determine where the source of the qualifying income. Ultimately, it is the entity that leverages the benefits of their services or goods.
Conclusion
To meet the critical conditions and criteria to be a QFZP, understanding key requirements is essential for every entity. Additionally, each entity has to meet all compliances prescribed by the UAE free zone authority as the failure to meet these conditions may lead to severe consequences.
To navigate the UAE’s corporate tax regime smoothly, having a trusted and expert business or tax advisor can be a game-changer. For maximized tax benefits, A&A Associate, the UAE’s leading business advisory firm that also specializes in company formation in UAE as well as accounting and taxation services can simplify the tax landscape and empower you to make an informed financial decision.
Contact us today : +971 54 793 9972 or enquiry@aaconsultancy.ae
