is-your-company-tax-free-in-uae-7-conditions-to-be-a-qualifying-free-zone-person

Is your company Tax free in UAE? 7 Conditions to be a Qualifying Free Zone Person

  • Admin
  • 07 Jun 2024

UAE has a 9% corporate tax regime. However, the authorities recognize the importance of Free Zones in UAE and have provided the opportunity for Free Zone companies to be tax-free. For a Free Zone company to qualify for 0% tax, 7 conditions must be met. Such entities that meet all these conditions are called Qualifying Free Zone Persons (QFZP).

If the required conditions are met a free zone company may qualify to be tax-free. If any one of the conditions is not met, you could end up paying taxes for 5 years.

Bottom Line
What are the 7 conditions to qualify as a Qualifying Free Zone Person?
1. Licensed in a Free Zone

This one is simple, the juridical person (or company) must be licensed out of a Free Zone.

This also includes cases where there is a branch in the Free Zone, and when a Free Zone company has a branch outside the Free Zone. It is important to note that in this case, only the Free Zone section of the business will be tax-free.

2. Adequate Substance in the Free Zone

The core income-generating activity (or CIGA) must be conducted within the Free Zone. There must be adequate assets, expenses, and full-time employees within the free zone to perform the core income-generating activities. We have discussed this same concept earlier along with Economic Substance regulations. The CIGA of each type of business will be different, we have discussed this in more detail here.

3. Must Derive Qualifying Income & ensure Non-Qualifying Income does not exceed the De-minimis conditions

In simple terms, qualifying income includes the following:

i) FZ - FZ Business: Income from transactions with other Free Zone Persons, (except income from excluded activities). The other Free Zone person must the beneficial recipient of the transaction.

ii) QA: Income from qualifying activities with Non-Free Zone Persons that are not excluded activities.

iii) QIP: income derived from the ownership or exploitation of Qualifying Intellectual Property

iv) De-minimis conditions: Any non-qualifying income, as long as the Free Zone person meets the de-minimis requirement. (If this condition is not met then the status of being a qualifying Free Zone Peron is lost). The non-qualifying income must not exceed the lower of AED 5,000,000 or 5% of total revenue.

There are some sources of revenue that may not be attributable to Qualifying income, which is not discussed here. To get a detailed understanding of the qualifying income for a qualifying Free Zone person click here.

4. Not elect to be subject to tax

A Free Zone person has an irreversible choice to elect to be taxable at 9% and pay taxes. To become a Qualified Free Zone Person, such an election must not be made.

5. Comply with Arms length

Arms length principles must be complied with in order to be a Qualifying Free Zone Person for transactions with related parties and for arrangements with its foreign and domestic permanent establishment. The profits being recorded on the basis of internationally accepted profit attribution methods. In simple terms the profit recorded in the Qualifying Free Zone Person must be fair, like as if it did such transactions with an unrelated party.

6. Maintain Transfer Pricing Documentation

While arms-length principles are followed by a Qualifying Free Zone Person, this is demonstrated in the Transfer Pricing Documentation. It must consider the functions performed, assets used and risk assumed. At the time of filing the tax return, a transfer pricing disclosure form must be submitted for such transactions. If the thresholds are met, a master file and local file must also be maintained.

To understand the basics of what are the transfer pricing disclosures a company needs to maintain you can click here.

7. Maintain Audited Financials

A Qualifying Free Zone Person must maintain audited financials. We have provided a guide on how to hire an audit firm in the UAE. For tax purposes generally, audit is mandatory for taxable persons with over AED 50,000,000 in turnover, in the case of Qualifying Free Zone Person, there is no such revenue threshold.

If any of the above conditions are not met then the Qualifying Free Zone Person status will be lost for that year and for the next 4 years. Which means for 5 years the taxable person will be taxed at 9%. During these 4 years, these conditions do not need to be maintained in order to qualify once this period is over.

For a qualifying Free Zone Person, unlike other juridical taxable persons, 9% tax is applicable on the entire taxable income, there isn't an AED 375,000 threshold of 0% tax.

 

Need Help?

For professional support on analyzing if your company meets all the conditions to be a qualifying Free Zone person, you can contact our tax team.

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