Qualifying Income for Freezone Persons under UAE Corporate Tax

It is likely that you are already aware that Corporate Tax took effect in the UAE on the 1st of June. The Federal Tax Authority (FTA) and the Ministry of Finance have jointly announced a fixed rate of 9% for this new taxation system. The UAE has released distinct regulations regarding Corporate Tax for UAE Free Zones. Under these guidelines, a key term called "Qualifying income" has been introduced, serving as the basis for calculating the tax liability. This distinctive approach showcases the UAE government's commitment to accommodating diverse economic zones and ensuring that taxation policies align with the specific needs and requirements of UAE Free Zones. In this session, we will discuss and examine the concept of Qualifying Income for individuals operating in these zones.

Understanding Qualifying Income

Qualifying Income refers to the earnings of a Qualifying Free Zone Person that are not subject to any Corporate Tax, resulting in a 0% tax rate. This type of income is determined by engaging in approved business activities or transactions within the designated Qualifying Free Zone. In short, if you meet the criteria and conduct business within the Qualifying Free Zone, any income you generate will be considered Qualifying Income and will not be subject to UAE Corporate Tax. That’s how Qualifying Income for Free Zones works.

Qualifying Income under UAE Corporate Tax

Free Zone Businesses in the UAE can benefit from a 0% corporate tax rate. However, certain criteria must be met to obtain the status of a Qualifying Free Zone Person (QFZP). The federal decree law of corporate tax outlines these conditions, which include generating revenue that falls within the category of Qualifying Income.

In a nutshell, a 0% corporate tax rate applies to individuals who meet the criteria as a Qualifying Free Zone Person (QFZP) by earning revenue that qualifies under the regulations of Qualifying Income in the corporate tax law. Those who do not fulfill the requirements for Qualifying Income will be subject to a 9% corporate tax rate and will not be considered a qualifying free zone person.

Qualifying Income for Freezone Persons under UAE Corporate Tax

As per the regulations outlined in Cabinet Decision No. 55 of 2023, the qualifying income for a qualifying free zone person is determined based on the following criteria.

• Qualifying income for a qualifying free zone person encompasses revenue generated from transactions with individuals inside the free zone, specifically related to qualifying activities that are not classified as excluded activities.
• The income for a qualifying free zone person is derived from transactions conducted with non-Free Zone Persons, excluding income generated from excluded activities. These excluded activities are determined by a decision made by the Minister and pertain to activities that result in non-qualifying income for the individual operating within the qualifying free zone.
• Additional income falls under the qualifying category when the Qualifying Free Zone individual meets the De Minimis requirements.
• If the Free Zone Person is the recipient of the services or goods, the income will be deemed as originating from transactions with that Free Zone Person.

Determining Qualifying Income for Domestic or Foreign Permanent Establishments

• If a Qualifying Free Zone individual has a domestic or foreign Permanent Establishment, the income payable to that establishment will be regarded as Taxable Income and subjected to a 9% Corporate Tax for the free zone business.
• When a Qualifying Free Zone Person possesses a Domestic or foreign permanent establishment and generates income within a designated tax period, the taxable earnings accumulated during that specific timeframe will be treated as if they belong to a distinct and autonomous entity, which is considered related to the Qualifying Free Zone Person.

Determining Qualifying Income for Immovable Property within a UAE Free Zone

Income obtained from transactions involving immovable property located within a Free Zone is subject to taxation. This applies to two types of transactions: those with Non-Free Zone Persons relating to commercial property, and those with any individual concerning immovable property that is not classified as commercial property.

The taxable income derived from these transactions, within a specific tax period, corresponds to the income payable to the immovable property. Calculation of this taxable income follows the provisions outlined in the relevant provisions of the Corporate Tax Law.

De Minimis Requirements

To meet the De minimis requirements, the Qualifying Free Zone Person must ensure that their non-qualifying revenue for a tax period does not surpass either their total revenue percentage or a specified amount determined by the Minister, whichever is lower.

When calculating non-qualifying revenue and total revenue, the following types of revenue are excluded:

1. Revenue obtained from transactions involving immovable property within a Free Zone, including:

• Transactions with Non-Free Zone Persons concerning commercial property.
• Transactions with individuals involving immovable property that is not classified as commercial property.

2. Revenue payable to a Qualifying Free Zone Person's domestic or foreign permanent establishment.

Non-Qualifying Revenue is revenue generated during a tax period that originates from either excluded activities or activities that are not considered Qualifying Activities, specifically when the other party involved is a Non-Free Zone Person.

Need help?

Being a renowned accounting and auditing firm in UAE, Reyson Badger possesses extensive expertise in Corporate Tax Law. We specialize in determining qualifying income and ensuring compliance with regulations, enabling businesses to qualify as qualifying free zone persons and enjoy the benefits of the 0% corporate tax rate in the UAE. Get in touch with Reyson Badger to know more.