Losing Qualifying Free Zone Person Status

UAE Qualifying Free Zone Persons enjoy zero percent corporate tax on Qualifying Income. However, this exemption is granted and its continuity is secured only under the certain conditions by following the rules and regulations. This article examines the aspects and conditions, the non-addressal of which would precipitate loss of QFZP status and the ensuing tax consequences.

Under what circumstances the QFZP status could be lost?

The companies listed for the QFZP jurisdiction after satisfaction of the statutory requisites may stripe away QFZP status from a business on noncompliance as stated below: -

Non-Compliance with Substance Requirements

For a business to qualify and hold QFZP status, its facility must show that it has significant activities within the free zone. This includes:

• Key Commercial Activities: - Business fields and their related activities earning the business its largest revenue streams have to occur in the free zone.
• Adequate Assets: - The business must possess or have access to enough review assets in order to fulfill its operations.
• Qualified Employees-: These are to ensure that the workforce is of high quality and well-qualified for the strength and demands of the business.
• Operating Expenditure: - It must spend the designated amount or a higher value of operating cost within the free zone area.

Any failure in compliance with any of the above-mentioned substance requirements would result in loss of QFZP status and accordingly the status which allows 0% corporate tax rate.

Exceeding Non-Qualifying Income Threshold

The requirements for non-qualifying income, as set forth by the Corporate Tax Guide, are quite challenging. If the income derived from sources other than QFZP activities exceeds AED 5 million or 5% of the gross income as the case is higher, then the QFZP will be considered as a normal corporation and will be taxed as such. As a result, entrepreneurs must be prudent with earning to adhere to these limitations.

Non-Compliance with Audited Financial Statements: -

In order to continue with the QFZP status, there are conditions that would have to be fulfilled, primarily including audited detailed accounting figures that depict the current standing of the business and its compliance with accounting standards. Therefore, possible issues in sustaining the beneficial tax treatment are likely to arise due to the failure to publish audited financial statements.

Violation of the Arm’s Length Principle

Any transactions entered into by QFZPs have to be made on an arm’s length basis thus implying that any transfer that is done between two related parties has to be done in the same manner as would be done by unrelated parties. Deviation from this principle may result in the withdrawal of Qualified Foreign Zaibatsu Partners, that is QFZP.

Tax Implications of Losing QFZP Status

When a business loses its QFZP status, it faces several significant tax implications: When a business loses its QFZP status, it faces several significant tax implications:

•  Standard Corporate Tax Rate: - These taxes are only paid by companies that have not attained QFZP status since others are charged the standard corporate tax rate of 9% on their taxable income. This change can have a notably negative impact on the total tax expense in an entity, which, in turn influences profitability as well as financial planning.
• Ineligibility for Tax Grouping and Relief Programs: -As for rights, a disqualified QFZP is prohibited from engaging in beneficial tax grouping or special relief programs. These include:

• Group Loss Relief: - The shifting of relief losses is prohibited by law.
• Small Business Relief: - Small companies become no longer entitled to reliefs intended for their category by the business.
• Qualifying Group Relief: - Some categorizations contain restrictions as to the operations that can be claimed for intra-group transactions.
• Business Restructuring Relief: - Several factors work against the business in a way that leads to ineffable reliefs that facilitate reorganizations without necessarily attracting immediate taxes. 

Can a Business Regain QFZP Status After Losing It?

A business will lose its QFZP status if it fails to meet set criteria/conditions, goals, and objectives previously agreed upon; however, a new application and reassessment can be made once all problems leading to removal as a QFZP have been addressed. Steps to consider include:

Address Non-Compliance Issues

• Substance Requirements: - Address any other issues concerning the presence of considerable operations like obtaining skilled personnel, requisite amount of assets, and increase in the great amount of operating expenses in the free zone.
• Financial Statements: -Make sure that the information related to the company’s financial status is recorded and reported correctly in accordance with the guidelines and norms.
• Arm’s Length Principle: - Recast all transactions with related parties and record everything according to the arm’s length standard.

Review Income Streams

• Income Analysis: - Identify income sources for each household and conduct a conclusive investigation to ensure other than excluded income is below the aforesaid limit.
• Business Practices Adjustment: - If needed, adapt the business’s practices to fall more in line with those that would qualify for a higher income limit.
• Seek Professional Guidance
• Consult Corporate Tax Experts: - Hire legal corporate tax advisors based in the UAE to help the company to go through the requalification procedure with minimal problems and conform with the laws and legislation all the time.

How Can Businesses Avoid Losing Their QFZP Status?

To safeguard their QFZP status, businesses should adopt proactive measures: To safeguard their QFZP status, businesses should adopt proactive measures:

Maintain Adequate Substance: -

• Core Activities: - It is desirable for first-tier income-generating activities to be implemented within the free zone.
• Asset, Employee, and Expenditure Compliance: - Continuously comply with the standards relating to assets the employee’s and operating expenses within the free zone.

 Monitor Income Streams

• Regular Assessment: - Periodically evaluate the level of non-qualifying income under each relevant category with a view of ascertaining that it does not exceed 5% of the organization’s total revenues.
•  Income Stream Management: - Instituted measures for effective and proper control of the sources of revenues.

Stay Informed: -

• Regulatory Updates: Companies should ensure that they undertake analyses of any changes that occur in tax legislation and compliance measures.
• Professional Advice: While making investment decisions give special consideration to changes in tax laws and should always stick to recommendations of the professional tax advisors.

Losing Qualifying Free Zone Person (QFZP) Status in the UAE

The UAE has allowed free Zone headquartered establishments to enjoy a zero percent of its corporate tax on its Qualifying Income Nevertheless, these privileges can only be enjoyed once they meet certain conditions necessary to retain the QFZP status. It is important to understand under what circumstances, the practice might lose the status of QFZP and the tax consequences that arise from it. The companies may lose QFZP status and the various implications that come with the loss of recognition to be prepared in case of losing the vital tax status. With the help of the tax benefits of UAE free zones, one may get a low-tax environment for its business while meeting the requirements for substance and constant monitoring of income in the region. It is crucial to be selective during the management of businesses, especially when consultative services may be required to meet QFZP requirements while also fostering growth and success among organizations in the UAE.

Frequently Asked Questions

What Circumstances May Lead a Business to Part with Its QFZP? 

There are several circumstances through which a business can be considered to be no longer qualified for the QFZP, this include failure to establish the business with a reasonable business carrying of the performing core business activities within the free zone, possession of insufficient assets, number of qualified employees, and operating expenditure that is below the benchmark established for the QFZP. Moreover, the above income cannot be more than AED 5 million or 5% of the total income if it is to avoid disqualification of the business. Failure in meeting the standards of audited financial statements and breach of the arm length in dealings with related parties is also grounds for being barred from QFZP.

What are the Consequences if QFZP Status is lost?

Erase of QFZP status entails the business to be subjected to 9% corporate tax on taxable income thus incurs a colossal tax liability. In addition, the business will be removing itself from the advantageous tax grouping coupled with special relief programs including transfer of tax losses, small business relief, qualifying group relief, and business restructuring relief affecting the company’s strategic and operational financial planning.

Whether a business can claw back its QFZP status after it has in some way been taken away?

However, theoretically, there is info that a business can revert back to its QFZP status once the problems that caused it disqualification have been rectified. This includes correction of non-conformity to substance provisions, confirmation and validation of financial statements, and compliance with the arm’s length transactions. Moreover, the companies need to scrutinize their income streams in order that non-qualifying income will not exceed the given limit and turn to the legal assistance in order to manage the requalification process.

What Do Businesses Risk Losing Their QFZP Status and How Can They Avoid It?

For businesses to maintain QFZP status, it is essential to ensure that the company’s main sources of income are centered within the free zone and assets deployed, number of employees and expenditures meet the QFZP criteria. The other aspect is also equally vital, which involves reviewing periodically the other income sources to guarantee that they also do not exceed 5%. It is necessary for businesses to regularly update themselves about the changes in the tax laws and obtain legal advice to ensure the companies’ compliance with the QFZP regulations.