As per the Article 18 of Federal Decree Law No. (47) Of 2022 of UAE Tax Legislation read with Ministerial decision No 265 of 2023 and Cabinet Decision No 100 of 2023, in order to claim the benefit of zero rate tax regime provided for Qualified Free Zone Persons (QFZP), following mandatory conditions must be fulfilled:
- Free Zone Person (FZP) maintains adequate substance in the State.
- FZP must derive Qualifying Income from the below mentioned Qualifying Activities:
- Manufacturing of goods or materials
- Processing of goods or materials
- Trading of Qualifying Commodities
- Holding of shares and other securities for investment purposes
- Ownership, management and operation of Ships.
- Reinsurance services
- Fund management services.
- Wealth and investment management services.
- Headquarter services to Related Parties.
- Treasury and financing services to Related Parties.
- Financing and leasing of Aircrafts
- Distribution of goods or materials in or from a Designated Zone
- Logistics services
- Any activities that are ancillary to the Qualifying Activities as specified above.
The above activities have been defined in the Ministerial Decision 265 of 2023.
- FZP complies with the Arm’s Length Principle in respect of transactions with the Related Party in accordance with Transfer Pricing methods as provided under Article 34 of the Decree-Law.
- FZP maintains documentation in respect of Transfer Pricing provisions applicable for transactions with Related and Connected Persons as provided under Article 55 of the Decree-Law.
- FZP has not elected to be subject to Corporate Tax under Article 19 of this Decree-Law.
- FZP has prepared audited financial statements in accordance with the Ministerial Decision on the requirements to prepare and maintain audited financial statements i.e. in accordance with International Financial Reporting Standard (IFRS).
- Further, in order to qualify as Qualified Free Zone Person, Non-Qualifying Revenue should not exceed the De-minimis amount as set out in the Ministerial Decision No. 265 of 2023, i.e. 5% of the Total Revenue or AED 5 million, whichever is lower.
In case Qualified Free Zone Person fails to meet any of the mandatory conditions at any time during the tax period then the FZP will not be considered as Qualified Free Zone Person not only in respect of the current tax period but also will be considered as Non-Qualified Person for subsequent four tax period(s) and therefore will not be eligible for zero (0%) rated tax.
Cabinet Decision 100 of 2023 specifies the manner of calculation of De-minimis provided as under.
De-minimis % of QFZP = Non Qualifying Revenue * 100
Total Revenue
It further provides that the following revenue which is otherwise subjected to a standard rate of tax shall not be considered and reduced from the Total revenue as well as not form part of Non Qualifying Revenue(NQR)
a) Revenue from domestic Permanent Establishment (PE)
b) Revenue from Foreign Permanent Establishment (PE)
c) Revenue from Immovable Property located in Free Zone (Except Revenue from transaction with other Free Zone Person in relation to Commercial Property in Free Zone)
d) Revenue from ownership or exploitation of Non Qualifying Intellectual property and Non qualified portion of Qualifying Intellectual Property . (This requires a separate calculation as specified in the Decision).
The Decision further provides that for determining Non-Qualifying Revenue and specifies that Revenue derived from the following activities is considered as Revenue from excluded activities i.e. Non qualifying Revenue.
a) Any transactions with natural persons except
i) Ownership, management and operation of Ships.
ii) Fund management services.
iii) Wealth and investment management services.
iv) Financing and leasing of Aircrafts.
b) Banking activities.
c) Insurance activities except reinsurance activities.
d) Finance and leasing activities except
i) Ownership, management and operation of Ships.
ii) Treasury and financing services to Related Parties.
iii) Financing and leasing of Aircrafts.
e) Revenue from Immovable Property located outside Free Zone .
f) Any activities that are ancillary to the above.
After deduction of Revenue subject to standard rate and excluded activities, Total Revenue would comprise of
a) Revenue from transactions with Non-Free Zone Person;
b) Revenue from transactions with other Free Zone Person;
c) Revenue from Qualified Intellectual Property Assets.
All Revenue from transactions with Non Free Zone Person other than from Qualifying Activities, as specified in the earlier para shall be considered as Non-Qualifying Revenue
Also in respect of transactions with other Free Zone Persons, Revenue arising from transactions with other FZP where such FZP is not the beneficial recipient of relevant services or goods, such Revenue is considered as Non-Qualifying Revenue.
As per the above calculation, if the De-minimis amount in respect of Non-Qualifying Revenue is below 5% of the Total Revenue (after adjusting for revenue subject to standard rate of tax) or if the De-minimis amount is less than AED 5 million then the FZP shall be considered as Qualified Free Zone Person and entitled to Zero rate of Corporate Tax. In case De-minimis amount exceeds AED 5 million or 5% of the Total Revenue then the FZP shall be taxable under standard rate.
However, non-qualifying FZP shall be eligible for basic exemption on profits up to AED 375000 as otherwise provided to all taxable persons. Non-qualifying FZP can even seek SME exemption available through Ministerial Decision no 73 of 2023 for Taxable persons having turnover not exceeding AED 3 million in the previous tax period and in the current tax period.
We have provided a calculator on our website to determine the De-minimis amount and check whether FZP qualifies for zero rate of tax. Please make best use of it and in case of any query, feel free to write to us.