Under the UAE's Corporate Tax regulations, Qualified Free Zone Individuals can avail of a zero percent tax rate on qualifying earnings arising from qualifying activities. The term qualifying activities pertains to any actions conducted by a Qualified Free Zone Individual that yield qualifying earnings as outlined in Ministerial Decision No. 139 of 2023. Whereas, non-qualifying activities refer to actions undertaken by a Qualified Free Zone Individual that result in non-qualifying earnings as per the aforementioned decision. Therefore, it's prudent for Free Zone Individuals to engage Tax Consultants in UAE to effectively ascertain their qualifying activities and confirm their exemption status in alignment with the UAE's Corporate Tax Law.
What Constitutes Qualifying Activities?
The activities carried out by a Qualified Free Zone Individual shall be deemed as qualifying activities in accordance with Ministerial Decision No. 139 of 2023, as mentioned below:
- Transformation and manipulation of goods or materials.
- Fabrication and production of goods or materials.
- Holding and trading of shares and other financial instruments.
- Ownership, management, and operation of ships.
- Reinsurance services are regulated by the authorized body within the State.
- Oversight of investment funds under the authority of the State.
- Services related to wealth and investment management are overseen by the competent authority in the State.
- Offering centralized management services to Related Parties.
- Provision of treasury and financial services to Related Parties.
- Financing and leasing of aircraft, including engines and replaceable components.
- Distribution of goods or materials from a Designated Zone to customers involved in resale, processing, modification, or further sales.
- Rendering logistics services.
In essence, the allocation of goods or materials must originate from or transpire within a specifically designated area known as the Designated Zone. Additionally, any goods or materials entering the jurisdiction should be channeled through the Designated Zone.
What Falls Under Non-Qualifying Activities?
The subsequent activities shall be classified as Non-Qualifying Eligible Activities based on Cabinet Decision No. 55 of 2023:
- Transactions with individual persons, excluding those linked to the specified Eligible Activities.
- Banking activities are subject to regulatory oversight by the authorized body in the State.
- Insurance activities are subject to regulatory oversight by the competent authority in the State.
- Financial and leasing activities under the regulatory jurisdiction of the authorized body in the State.
- Ownership or utilization of immovable property, except for Commercial Property located in a Free Zone involving other Free Zone Individuals.
- Ownership or utilization of intellectual property assets.
In essence, the prerequisites are satisfied if the Non-Qualifying revenue derived by the Qualified Free Zone Individual within a Tax Period doesn't exceed 5% of the total revenue or AED 5,000,000, whichever is lower.
Qualifying Conditions for Qualified Free Zone Individuals
A Qualified Free Zone Individual must adhere to the following two conditions:
- Maintain a substantial presence within the State.
- Generate Eligible Income as specified in the Corporate Tax Law.
- Prepare audited financial statements in compliance with the Corporate Tax Law's stipulations.
If a Qualified Free Zone Individual fails to meet any of these conditions during a Tax Period, their status as a Qualified Free Zone Individual will cease from the start of the relevant Tax Period for the subsequent four Tax Periods.
Leverage the Expertise of Tax Consultants in the UAE
For the effective determination of Eligible Activities and establishment of exemption status for Corporate Tax purposes in the UAE, it's advisable for Free Zone Individuals to seek the services of reputable Tax Consultants in UAE. Reach out to us today, and we'll be delighted to offer our assistance.
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.