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.
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: -
For a business to qualify and hold QFZP status, its facility must show that it has significant activities within the free zone. This includes:
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.
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.
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.
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.
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:
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:
To safeguard their QFZP status, businesses should adopt proactive measures: To safeguard their QFZP status, businesses should adopt proactive measures:
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.
| Aspect | Details |
|---|---|
| Corporate Tax Rate | 0% on Qualifying Income for Free Zone establishments |
| Conditions for QFZP Status | Must meet specific conditions to retain status |
| Losing QFZP Status | Understand circumstances leading to loss and tax consequences |
| Implications | Various tax implications arise from losing QFZP status |
| Tax Benefits | Free Zones provide a low-tax environment if requirements are met |
| Requirements | Substance requirements and constant income monitoring in the region |
| Business Management | Selective management needed, consultative services may be required |
| Goal | Foster growth and success among organizations in the UAE |
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.
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.
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.
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.
Mostafa is a seasoned Tax Consultant with over 5 years years of experience gained in diverse taxations matters. He has vast expertise in settling tax disputes with the Federal Tax Authority and handling of tax procedures in compliance with tax laws. He is adept in investigating underlying tax intricacies and offering expert tax advisory. He is also well-versed in conducting tax analysis’s and negotiations with the Tax Regulators, upon tax preparation and filing. Mostafa specializes in the areas of Tax law, Auditing, Accounting and Banking law.