Free zones are an important aspect of the UAE economy and hold a crucial position in the process of changing the economy of the UAE and the global economy. Some of the benefits that accrue from engaging in business in the Free Zones of UAE include the following: commercial freedom, less formalities on the commercial processes, variety of business structures, open door policy on foreign investment, informal disposition of business entities, and well-developed infrastructure. This article will discuss the role of corporate tax consultant in Dubai by providing guidelines about the UAE corporate tax law that enables free zone enterprises and branches to be eligible for a zero percent tax on certain qualifying income and activities of such free zones to promote their significance in the economic development of the country.
Conditions to Qualify as a Free Zone Person in the UAE
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0% Corporate Tax on Qualifying Income of the Free Zone
In free zones, there is a 0% corporate tax on qualifying income. This applies to transactions with qualifying individuals in the free zone and to qualifying activities carried out in the free zone. The text also mentions that taxpayers should verify if they are in a free zone or designated zone through the free zone authority.
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Qualifying Free Zone Persons (QFZPs) Requirement
To be considered a Qualifying Free Zone Person (QFZP) in the UAE, individuals must meet the criteria of the UAE Corporate Tax Law and its regulations. If these conditions are violated, their status as a QFZP will be withdrawn and they will be subject to the normal Free Zone Corporate tax laws and rates. If a natural person does not choose otherwise or does not meet the requirements, they will be presumed to be a QFZP.
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Definition and Criteria of a Free Zone Person
A free zone person consists of organizations incorporated or registered in UAE free zones.
Criteria for qualifying encompass having a head office or branch in a free zone, assembly substance requirements, and tasty middle-cost-growing activities.
Substance Requirement for Free Zone Persons
Entities ought to exhibit enough substance inside the Free Zone to take advantage of the 0% company tax on eligible earnings. This consists of owning good enough property, a group of workers, and operational abilities within the particular place.
Adjustments to Qualifying Income
Qualifying earnings assets encompass transactions with other Free Zone Persons, the sale of goods associated with qualifying highbrow belongings, and different eligible sports. Non-qualifying earnings are subject to a preferred corporate tax rate of 9%.
Taxing Qualifying Free Zone Persons (QFZPs)
QFZPs revel in a zero% corporate tax fee on qualifying profits. Non-qualifying earnings are taxed at 9%. Entities with taxable profits exceeding 375,000 AED are a problem for conventional corporate tax quotes.
Cessation of QFZP Status
Entities can also lose QFZP popularity if they opt for widespread corporate tax prices or fail to satisfy qualifying criteria consecutively for four monetary years.
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Qualifying and non-qualifying Income Sources
In the following table, income source is illustrated and differentiated into total income and non-qualifying revenue based on the previous example :
| Income Source | Amount (AED) | Qualification |
| Total Income | 10,000,000 | |
| From Foreign Source | 8,000,000 | Qualified |
| From Domestic Permanent Establishment | 2,000,000 | Qualified |
| Non-Qualifying Revenue | 2,000,000 | |
| Excluded Activities | 5,000,000 | N/A |
In the table above, It provides an example where a Free Zone Person has an income of 10,000,000 AED, with 8,000,000 AED from a foreign source and 2,000,000 AED from a domestic permanent establishment. It states that the two million AED will be considered non-qualifying. However, if the person earns 5,000,000 AED from excluded activities, there will be no non-qualifying revenue. It also mentions that if the funds come from a fixed place of business in the home country and are taxed at a corporate tax rate of 9%, they will be considered non-qualified revenue.
4.1. Taxing Qualifying Free Zone Persons (QFZPs):-
Corporate Tax Rates
Qualifying income = 0%
The Non-Qualifying taxable income = 9%
- Threshold to Taxable Income:- A QFZP is subjected to tax of 9% to other income apart from the qualifying income and does not benefit from the law that categorizes entities liable to 0% corporate tax on taxable income that exceeds a threshold of 375,000 AED.
- Standard Corporate Tax Application:- Corporate Tax UAE Article 20 clearly states that the Free Zone Person shall be allowed to elect the standard corporate tax of 9%. Thus, the Foreign Permanent Establishment is thus ruled out for any other sources of income other than the ones that would give the qualifying income. Therefore, qualifying income might not be taxable income.
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Cessation of Qualifying Free Zone Persons (QFZPs)
Therefore, a QFZP will not be allowed to be known as a QFZP for the tax period for which the QFZP wants to be taxed under the normal corporation tax regime or where it fails to satisfy the requirements for the categorisation of a QFZP. This is possible if it chooses to accept responsibility for a corporate tax or loses its QFZP status for four subsequent fiscal years.
How can a Corporate tax advisor can Assist?
Corporate tax advisor in Dubai, UAE plays a critical role in guiding businesses on qualifying as Free Zone Persons. They ensure compliance with UAE tax laws, optimize structures for 0% corporate tax benefits, and provide strategic advice on maintaining Free Zone status while maximizing tax advantages.
FAQs
What are the conditions to qualify as a Free Zone Person in the UAE?
The Free Zone Person in the UAE requires the business to be incorporated, established, or registered in the UAE Free Zone, adequate substance requirements, and undertake the core business activities within the Free Zone.
What documentation is required for Free Zone qualification?
They include incorporation or registration certificates, proof of adequate substance such as assets, staff, operating costs, and transfer pricing documentation that includes master file, local file, and disclosure form.
How does corporate tax apply to Free Zone Persons?
Free Zone Persons are subjected to a zero percent corporate tax on qualifying income. Non-qualifying income is taxed at the standard rate of 9%.
Can a business lose its Free Zone Person status?
Yes, a business can lose its Free Zone Person status if it does not meet the conditions for qualifying, if it breaches the conditions or if it chooses to go for the normal.
