The UAE’s introduction of corporate tax marked a significant shift in the business landscape. However, free zones continue to offer a compelling advantage for qualifying businesses, providing a 0% corporate tax rate on certain qualifying activities. Here’s how companies in these zones can capitalize on the exemption.
How It Works:
Under the new law, the 0% tax rate applies to qualifying free zone persons (QFZP)—entities that meet specific requirements. These include:
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Qualifying Income: Income generated from qualifying activities or transactions within or between free zone persons.
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Adequate Substance: The business must have substantial operations within the free zone to qualify.
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De Minimis Requirement: The business must comply with specific thresholds to qualify for the exemption.
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Arm’s Length and Transfer Pricing: The business must adhere to arm’s length principles and comply with transfer pricing rules.
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Financial Documentation: Businesses must maintain audited financial statements and ensure proper record-keeping.
What Makes a Free Zone Person Qualify?
To maintain QFZP status and continue benefiting from the 0% corporate tax rate, businesses must:
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Derive qualifying income from transactions within the free zone or between free zone companies.
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Perform core income-generating activities within the free zone. This includes maintaining qualified employees and assets for those activities.
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Avoid electing standard tax rates: Businesses must not opt for the standard corporate tax regime and must meet additional compliance measures.
Maintaining Adequate Substance:
Maintaining adequate substance in the free zone is crucial to retain the QFZP status. This includes:
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Core Activities: Perform essential, revenue-generating activities within the free zone (or designated zones for distribution).
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Qualified Employees: Employ full-time staff within the free zone to perform the business's core activities.
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Physical Assets: Maintain adequate physical assets, not just virtual offices or operations.
A business can outsource non-core activities, but core activities must remain within the zone for the business to qualify for the tax exemption.
Example:
Company A: A business with a warehouse in a designated zone for storage and distribution might qualify for the 0% tax rate if it performs core distribution activities within that zone. However, if it does not meet the substance requirements, such as having the necessary employees and operational presence within the designated zone, it may lose its qualifying status, even if transactions are conducted with other free zone businesses.
