Summary of Free Zone Corporate Tax Rules and Requirements to be a QFZP (Qualifying Free Zone Person)

This article is written by Marina Zhirnova, Managing Partner at UPPERCASE Accounting 

Free Zone Corporate Tax Rules:

The Free Zone Corporate Tax regime in the UAE provides a 0% Corporate Tax rate on Qualifying Income. This benefit is available to Free Zone Persons (FZPs) and applies to:

• Transactions between QFZPs and other Free Zone Persons, provided the Free Zone Person is the Beneficial Recipient of these transactions.
• Certain activities performed within the prescribed geographical areas of a Free Zone (or a Designated Zone for distribution activities).

The list of Designated Zones for VAT purposes is provided by Cabinet Decision No. 59 of 2017. Taxpayers should confirm with their respective Free Zone Authority whether they operate in a Free Zone or Designated Zone for Corporate Tax purposes.

Conditions to be a QFZP:

A Free Zone Person (FZP) must meet all of the conditions required in the Corporate Tax Law and implementing decisions to qualify for the 0% Corporate Tax rate. These conditions include:

Definition of Free Zone Person:

• A juridical person incorporated, established, or otherwise registered in a Free Zone.
• Includes branches of Non-Resident Persons or UAE juridical persons registered in a Free Zone.
• Free Zone authorities and other Government Controlled Entities in a Free Zone are also considered Free Zone Persons.

 

Adequate Substance:

• Must undertake core income-generating activities within the Free Zone or Designated Zone.
• Must have adequate assets, full-time employees, and incur sufficient operating expenditures in the Free Zone to perform these activities.

 

Qualifying Income:

• Derived from transactions with other Free Zone Persons (Beneficial Recipient) and not related to Excluded Activities.
• Related to Qualifying Activities that are not Excluded Activities.
• Income from Qualifying Intellectual Property.
• Other income, provided de minimis requirements are met.

 

Election to Standard Corporate Tax:

Must not have elected to be subject to the standard Corporate Tax rules and rates.

Arm’s Length Principle:

Must comply with the arm’s length principle for transactions with Related Parties and arrangements between the Free Zone parent and its Foreign or Domestic Permanent Establishments.

Transfer Pricing Documentation:

Must maintain documentation to demonstrate the arm’s length nature of relevant transactions and prepare master and local files and disclosure forms if thresholds are met.

Audited Financial Statements:

Must prepare and maintain audited Financial Statements regardless of the amount of Revenue earned.

De Minimis Requirements:

• Non-qualifying Revenue must not exceed the lower of AED 5,000,000 or 5% of total Revenue.
• Non-qualifying Revenue includes income from Excluded Activities, non-Qualifying Activities with Non-Free Zone Persons, and transactions where the Free Zone Person is not the Beneficial Recipient.

This summary provides a concise overview of the Free Zone Corporate Tax rules and the conditions necessary to be recognized as a QFZP (Qualifying Free Zone Person) as per the document provided.