The Federal Tax Authority (FTA) clarified which Free Zone Persons are eligible for the 0% Corporate Tax rate on their Qualifying Income.
In a statement to Aletihad, the FTA emphasised that the Free Zones located throughout the UAE are integral part of its comprehensive economic environment, and play a pivotal role in driving the growth, prosperity, and economic transformation of the UAE.
In its leading role to provide relevant information on Corporate Tax in the UAE and raising awareness among Free Zone Persons, the FTA has published a Corporate Tax Guide specifically for Free Zone Persons, now available on its website. The guide outlines the procedures for Corporate Tax registration and details the conditions required for Free Zone Persons to qualify for the 0% Corporate Tax rate on their Qualifying Income. The guide also includes several practical examples to ensure a comprehensive understanding of the key elements of the Corporate Tax Law as they apply to Free Zone Persons. The FTA has also published a Basic Tax Information Bulletin specifically about Free Zone Persons on its website.
FTA Director General Khalid Ali Al Bustani confirmed the conditions to be a Qualifying Free Zone Person that can benefit from the 0% Corporate Tax rate on their Qualifying Income, noting that the Qualifying Free Zone Person must maintain adequate substance in a Free Zone, derive Qualifying Income, has not elected to be subject to the standard Corporate Tax rate in the UAE, and must comply with the arm’s length principle for transactions with Related Parties and maintain Transfer Pricing documentation. The FTA spokesperson added that the Qualifying Free Zone Person must maintain Transfer Pricing documentation as well as audited Financial Statements, and their non-qualifying Revenue must not exceed the lower of Dh5 million or 5% of its total revenue, as per the de minimis requirement.
Al Bustani explained that Qualifying Income of a Qualifying Free Zone Person must be income derived from the following sources:
– Transactions with other Free Zone Persons, provided the transactions do not relate to Excluded Activities,
– Transactions relating to Qualifying Activities that are not Excluded Activities,
– Income derived from the ownership or exploitation of Qualifying Intellectual Property and any other income, provided the de minimis requirements are met.
Al Bustani also mentioned that Qualifying Activities also include ancillary activities, which are activities that are necessary for the performance of the main Qualifying Activity or that make a minor contribution to the main Qualifying Activity and are so closely related to the main Qualifying Activity that it should not be regarded as a separate activity. They further noted that Excluded Activities include any transactions with natural persons, except transactions in relation to Qualifying Activities relating to ownership, management and operation of ships, fund management services, wealth and investment management services, and financing and leasing of aircraft, banking activities, finance and leasing activities, and insurance activities.
This also applies to the ownership or exploitation of Immovable Property, other than Commercial Property located in a Free Zone where the transaction concerning such Commercial Property is conducted with other Free Zone Persons.
Al Bustani noted that when a Qualifying Free Zone Person conducts business outside the Free Zone through a Domestic Permanent Establishment or a Foreign Permanent Establishment, the income attributed to this permanent establishment will be subject to Corporate Tax at a rate of 9%.
In conclusion, the FTA encourages all concerned parties and stakeholders to regularly consult the latest Corporate Tax guides, which are published on their website.
The FTA urges all Free Zone Persons to contact their relevant licensing authorities to determine whether they are operating in a Free Zone or a Designated Zone for Corporate Tax purposes.
ALETIHAD
