The UAE’s adoption of corporate tax has significantly reshaped its business environment, bringing the nation in line with the OECD’s BEPS project’s Pillar Two global standards. This strategic move not only strengthens the UAE’s economic structure but also introduces new compliance considerations for businesses, particularly those operating in Free Zones. A pivotal concept in this new framework is the Qualifying Free Zone Person (QFZP). Grasping the implications of being a QFZP is essential for businesses aiming to optimize their tax strategies and ensure compliance.
Distinguishing Mainland and Free Zone Businesses
When setting up a business in the UAE, entrepreneurs have two primary routes; establishing on the mainland or within one of the 46 Free Zones. Each path offers distinct regulatory landscapes and benefits.
Mainland Ventures
Mainland businesses register with the Department of Economic Development (DED) in their respective UAE emirate. These entities enjoy unrestricted trade across the UAE and internationally. Recent federal law amendments now permit foreign investors to wholly own their mainland companies in specific sectors, such as certain professional services. However, industries like finance, banking, and insurance may still necessitate partial Emirati ownership. Since 2023, mainland companies have been required to file tax returns and pay a 9% corporate tax on taxable income exceeding AED 375,000 annually.
Free Zone Enterprises
Free Zones present a more business-conducive environment, offering 100% foreign ownership and simplified regulations. These zones actively court foreign investment with tax exemptions and other incentives. While Free Zone companies can freely trade within the zone and globally, they need local partners or distributors to trade within the UAE mainland. Qualifying Free Zone businesses are exempt from corporate tax, making them an appealing choice for many businesses.
Defining a Qualifying Free Zone Person (QFZP)
To qualify as a QFZP, a business must satisfy several key criteria:
Registration with a UAE Free Zone Authority
Your business must register with a Free Zone Authority in the UAE and maintain a substantial presence in the country. This legitimizes your company within the Free Zone, subjecting it to local regulations and benefits.
Engaging in Qualifying Activities and Earning Qualifying Income
Your enterprise should participate in activities defined as qualifying under the corporate tax law. The income generated from these activities is classified as qualifying income. To benefit from the tax exemption, you must opt out of the UAE Corporate Tax regime.
Adhering to UAE Transfer Pricing Regulations
Your business must comply with the UAE’s transfer pricing regulations, ensuring that transactions between related entities occur at arm’s length or fair market value. This prevents tax evasion through intra-company dealings.
Qualifying Income Explained
As a QFZP, you enjoy a 0% corporate tax rate on qualifying income, which is derived from qualifying activities within the Free Zone. The UAE Cabinet Decision No. 55 of 2023 outlines the criteria for qualifying income:
Transactions with Other Free Zone Entities
Income from dealings with other Free Zone businesses qualifies, barring any activities designated as ‘excluded’ by the Minister.
Transactions with Mainland Companies
Income from transactions with mainland companies can qualify if the activities comply with regulations and are not excluded. A de minimis threshold ensures that such income remains a minor part of your total earnings.
De Minimis Thresholds
The de minimis rule permits a certain level of non-qualifying income. While some non-core activities, like renting office space, may be allowed, they cannot form a significant part of your operations. Specific thresholds are set by the authorities.
Permanent Establishments (PEs)
If your QFZP business operates significantly outside the Free Zone, such as having a mainland warehouse, this external operation might be considered a ‘permanent establishment’ (PE). Any income from this PE is subject to a 9% corporate tax by the Federal Tax Authority (FTA).
Immovable Property in Free Zones
Income from renting commercial properties within the Free Zone qualifies. However, renting to non-Free Zone businesses for commercial use does not qualify.
Qualifying Activities Under the Corporate Tax Law
Article 18 of the UAE Corporate Tax Law deems the following activities as qualifying for a QFZP:
- Manufacturing goods or materials.
- Processing goods or materials.
- Reinsurance services under state supervision.
- Fund management under state regulation.
- Owning stocks and securities.
- Managing and operating ships.
- Wealth and investment management services under state oversight.
- Financing and leasing aircraft, including engines and components.
- Distributing goods or materials for resale, including modifications.
- Providing headquarters services to affiliates.
- Offering treasury and financing services to associated parties.
- Logistics services.
- Supportive activities related to the above services.
The De Minimis Rule
The De Minimis Rule is integral to the QFZP framework. It permits businesses to earn some non-qualifying income while still enjoying the 0% corporate tax rate on qualifying income. To qualify, non-qualifying income must not exceed the de minimis limit, which is the lower of 5% of total revenue or AED 5 million.
Conclusion
Understanding and navigating the UAE Corporate Tax Law can be challenging. If you need expert guidance on the intricacies of the Qualifying Free Zone Person or any other aspect of UAE Corporate Tax Law, contact Beyond Numbers. Our seasoned professionals are equipped to steer you through the complexities, ensuring your business remains compliant and competitive in the UAE market.