For Corporate Tax purposes in UAE, Qualifying Free Zone Persons can enjoy a tax rate of zero per cent on Qualifying Income generated from Qualifying Activities. Qualifying Activities refers to any activities conducted by a Qualifying Free Zone Person from which Qualifying Income is derived as determined by Ministerial Decision No. 139 of 2023. Whereas, Excluded Activities refers to any activities carried out by a Qualifying Free Zone Person from which Non-Qualifying Income is derived as per the aforementioned Decision, respectively. Therefore, it is advisable for Free Zone Persons to seek the services of Corporate Tax in UAE to effectively determine their Qualifying Activities and establish their exemption status in compliance with the Corporate Tax Law in UAE.
What are the Qualifying Activities?
The following activities carried out by a Qualifying Free Zone Person shall be treated as Qualifying Activities as per Ministerial Decision No. 139 of 2023
- Transformation and handling of goods or materials.
- Production and fabrication of goods or materials.
- Holding and trading of shares and other securities.
- Ownership, administration, and operation of ships.
- Reinsurance services are regulated by the competent authority in the State.
- Management of investment funds overseen by the competent authority in the State.
- Services related to wealth and investment management are regulated by the competent authority in the State.
- Provision of centralized management services to Related Parties.
- Treasury and financing services are provided to Related Parties.
- Financing and leasing of aircraft, including engines and replaceable components.
- Distribution of goods or materials from a Designated Zone to a customer engaged in resale, processing, modification, or further sales.
- Provision of logistics services.
In essence, the allocation of goods or materials needs to occur within or originate from a specifically assigned area, termed the Designated Zone. Furthermore, any goods or materials entering the jurisdiction must be brought in through the Designated Zone.
Read more: UAE Corporate tax registration and return filing services
What are the Excluded Activities?
The following activities shall be deemed Excluded Activities as per Cabinet Decision No. 55 of 2023
- Any transactions with natural persons, except transactions related to the specified Qualifying Activities.
- Banking activities are subject to regulatory oversight by the competent authority in the State.
- Insurance activities are subject to regulatory oversight by the competent authority in the State.
- Finance and leasing activities are subject to regulatory oversight by the competent authority in the State.
- Ownership or exploitation of immovable property, except for Commercial Property located in a Free Zone where the transaction involves other Free Zone Persons.
- Ownership or exploitation of intellectual property assets.
Essentially, the requirements will be considered satisfied if the non-qualifying revenue derived by the Qualifying Free Zone Person in a Tax Period does not exceed 5% (five per cent) of the total revenue of the Qualifying Free Zone Person in that Tax Period or AED 5,000,000 (five million dirhams), whichever is lower.
Conditions for Qualifying Free Zone Persons
A Qualifying Free Zone Person must meet the following two conditions
- Maintain adequate substance in the State.
- Derive Qualifying Income as specified in the Corporate Tax Law.
- The Qualifying Free Zone Person must prepare audited financial statements in accordance with the Corporate Tax Law’s requirements to prepare and maintain audited financial statements.
Read more: How does Corporate Tax Apply to a Qualifying Public Benefit Entity?
Whereas, if a Qualifying Free Zone Person fails to meet any of the conditions stipulated in the Corporate Tax Law in UAE at any particular time during a Tax Period, it shall cease to be a Qualifying Free Zone Person from the beginning of the relevant Tax Period and for the subsequent four (4) Tax Periods.
Table: Overview of Qualifying and Excluded Activities for Free Zone Persons
This table format provides a clear and structured overview, making it easier for readers and stakeholders to understand the regulatory framework for Qualifying Free Zone Persons in the UAE
| Category | Details | Governing Decision |
|---|---|---|
| Qualifying Activities |
|
Ministerial Decision No. 139 of 2023 |
| Excluded Activities |
|
Cabinet Decision No. 55 of 2023 |
| Revenue Limit for Exclusion | Non-qualifying revenue must not exceed 5% of total revenue or AED 5,000,000 (whichever is lower) | Cabinet Decision No. 55 of 2023 |
| Conditions for Qualifying Status |
|
Corporate Tax Law |
| Consequences of Non-Compliance | Loss of Qualifying Free Zone Person status for the relevant tax period and the next four tax periods | Corporate Tax Law |
Seek the expert services of Corporate Tax Consultants in the UAE
To effectively determine Qualifying Activities and establish the exemption status for Corporate Tax purposes in UAE, Free Zone Persons should seek the services of trusted Corporate Tax Consultants in UAE. Therefore, contact us today and we shall be glad to assist you.
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.
