In the dynamic and growing economy of the United Arab Emirates (UAE), a strategic understanding of Qualifying Free Zone Persons has emerged as a crucial consideration for businesses seeking to capitalize on the advantages of the Free Zone Corporate Tax regime. Delving deeper into this concept, we explore the defining criteria of Qualifying Free Zone Persons, the scope of their qualifying income, permissible activities, and the ramifications of this unique status.

Qualifying Free Zone Person Criteria:

Qualifying Free Zone Person status is conferred upon entities that meet specific prerequisites, enabling them to unlock preferential tax benefits. These prerequisites encompass a series of conditions that include

• Maintain adequate substance in a Free Zone.
• Derive Qualifying Income.
• Not have made an election to be subject to the regular UAE Corporate Tax regime.
• Comply with arm’s length principle and transfer pricing rules and documentation requirements.
• Prepare and maintain audited financial statements.
• Non-qualifying revenue does not exceed the de minimis requirements.

It is important to note that failure to satisfy any of these conditions may result in a Qualifying Free Zone Person losing their status, leading to a five-year ineligibility for the Free Zone Corporate Tax regime.

Qualifying Income

Qualifying Income of the Qualifying Free Zone Person shall include the below categories of income, provided that such income is not attributable to a Domestic Permanent Establishment or a Foreign Permanent Establishment and ownership or exploitation of immovable property

• Income derived from transactions with other Free Zone Persons, except for income derived from Excluded Activities.
• Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities.
• Any other income provided that the Qualifying Free Zone Person satisfies the De minimis requirements.

Qualifying Activities

Qualifying Activities encompass a diverse range of operations that empower entities to attain Qualifying Free Zone Person status. These activities encompass:

• Manufacturing of goods or materials.
• Processing of goods or materials.
• Holding of shares and other securities.
• Ownership, management and operation of Ships.
• Reinsurance services that are subject to the regulatory oversight.
• Fund management services that are subject to the regulatory oversight.
• Wealth and investment management services that are subject to the regulatory oversight.
• Headquarter services to Related Parties.
• Treasury and financing services to Related Parties.
• Financing and leasing of Aircraft, including engines and rotable components.
• Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale.
• Logistics services.
• Any activities that are ancillary to the above activities.

Excluded Activities

Certain activities fall outside the purview of Qualifying Free Zone Persons. These include

• Any transactions with natural persons, except transactions in relation to the Qualifying Activities.
• Banking activities that are subject to the regulatory oversight.
• Insurance activities that are subject to the regulatory oversight.
• Finance and leasing activities that are subject to the regulatory oversight.
• Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other Free Zone Persons.
• Ownership or exploitation of intellectual property assets.
• Any activities that are ancillary to the above activities.

In conclusion, the Qualifying Free Zone Person classification extends a remarkable opportunity for businesses to optimize their tax standing within UAE free zones. By aligning with the stipulated criteria, entities can leverage the benefits of the Free Zone Corporate Tax regime, laying the foundation for sustained growth and profitability.

Corporate Tax Obligations.

A universal requirement for all Free Zone Person is to undertake business registration and submit a Corporate Tax Return, regardless of whether an entity qualifies as a Qualifying Free Zone Person. Adherence to this mandate is imperative. These policies underscore the nation's dedication to tax compliance, transparency, and accountability within its business ecosystem. By fulfilling this obligation, entities contribute to a cohesive and equitable tax framework, thereby fostering a business environment conducive to growth, innovation, and sustainable success. For additional information and expert guidance on UAE Corporate Tax, reach out to us at: ?? alliott@emirates.net.ae | ?? +971 4 222 7355, +971 2 622 2300.