This article has been researched and written by Scott Cairns and the team at Creation Business Consultants. AI has not been used in generating this article.
The Corporate Tax was introduced in the UAE to be effective from 1 June 2023. Here, the article discusses the UAE Corporate Tax Rates for Qualifying Free Zone persons in relation to their application to further address the details of the determination of tax rates for businesses located in Designated Free Zones.
UNDERSTANDING UAE CORPORATE TAX RATES
The Corporate Tax Law stipulates specific rates for Qualifying Free Zone persons:
- 0% on Qualifying Income.
- 9% on Taxable Income, which is not Qualifying Income as reflected (as provided in Article 18 para 1b of the Corporate Tax law).
To determine the applicable Corporate Tax Rate for Persons located in Designated Free Zones, we will elaborate on the following topics below:
- Qualifying Free Zone Person.
- Qualifying Income from a Qualifying Free Zone.
- Qualifying activities.
- Applicable Corporate Tax Rate for the distribution of goods within designated Free Zones.
WHAT IS A QUALIFYING FREE ZONE PERSON?
The description of a Qualifying Free Zone Person is important in the context of the Corporate Tax Law in the UAE. We outline the key conditions that must be satisfied to be recognised as a Qualifying Free Zone Person.
WHAT ARE THE CONDITIONS FOR QUALIFYING FREE ZONE PERSON?
The conditions for a qualifying free zone person include, but are not limited to:
1. Adequate Substance
- Definition: A Qualifying Free Zone Person should display a substantial presence.
- Significance: The entity must have sufficient substance to be eligible for recognition under the UAE Corporate Tax Law.
2. Generation of Qualifying Income
- Requirements: Qualifying Free Zone Persons must undertake income-generating activities that qualify as Qualifying Income.
- Significance: Determining and having support for the sources of Qualifying Income are important issues in tax compliance and tax planning.
3. Non-Election for 9% Corporate Tax Rate
- Condition: The Qualifying Free Zone Person mustn’t elect to apply the 9% Corporate Tax Rate.
- Implication: Understanding and following this condition is important to remain eligible for favourable tax rates.
4. Arm’s Length Transactions and Transfer Pricing Documentation
- Standard: Related party food-related transactions must be dealt with at Arm’s length.
- Documentation: An entity will need a master outlet and a local outlet for purposes of transfer pricing.
- Importance: An entity will need to ensure that transfer pricing rules are met in documenting that it can qualify as a Qualifying Free Zone Person.
WHAT IS QUALIFYING INCOME FROM A QUALIFYING FREE ZONE?
It is important to seek to understand Qualifying Income for entities (businesses) that operate in Qualifying Free Zones in the UAE. Below, we analyse the conditions set out in Article 3 of Cabinet Decision No. 55 of 2023, specifying the kind of income that may be termed as Qualifying Income.
QUALIFYING INCOME CRITERIA:
1. Income Derived from Free Zone Transactions
- Definition: Qualifying Income would then be the revenue from transactions taking place amongst the Free Zones.
- Exception: The purpose excludes Excluded Activities.
2. Income from Non-Free Zone Transactions
- Transactions on the Qualifying Income may arise with non-Free Zone Persons, especially where the transaction is a Qualifying Activity and is not excluded as an Excluded Activity.
3. Other Income with De Minimis Compliance
- Inclusion: Any other kind of income shall be treated as Qualifying Income if the Qualifying Free Zone Person complies with the de minimis requirements.
- Significance: The satisfaction of the de minimis requirements therefore ensures the inclusion of a varied range of income types under the heading of Qualifying Income.
WHAT ARE THE QUALIFYING ACTIVITIES RELATED TO INCOME DERIVED FROM TRANSACTIONS WITH A NON-FREE ZONE?
For the entities operating in Designated Free Zones in the UAE, knowing the particulars with respect to Qualifying Activities is of utmost importance. We detail the Qualifying Activities related to income from transactions with non-Free Zone, and recent developments in both the legislative process and public consultations.
EXPLORING QUALIFYING ACTIVITIES:
1. Distribution of Goods or Materials
- Definition: Defined in Article 2, Paragraph 1k of Ministerial Decision 139 of 2023, Qualifying Activities include the distribution of goods or materials from a Designated Zone to a customer who is to resell, reprocess, or modify the goods to sell or resale.
- Location Requirement: A trading entity must have an on-the-ground presence in one of the designated zones in the Free Zone (e.g., Jebel Ali Free Zone Authority) to be eligible to enjoy 0% Corporate Tax Rate.
2. Clarifications on Import/Export Requirements
- Previous Ambiguity: It is not stated by this section whether goods and materials are to be physically imported and later exported out of the UAE to be able to qualify as Qualifying Activities.
- Developments: The Ministry of Finance issued a public consultation in August 2023. It raised the possibility that actual importing and exporting may not necessarily be a concern for Qualifying Activities. Although this advice is not legally binding, it is an important indicator of the Ministry’s view on the practice.
LEGISLATIVE CHANGES:
3. Cabinet Decision No. 100 of 2023:
- Update: A new committee decision has issued Cabinet Decision No. 100 that replaces Cabinet Decision No. 55. Furthermore, there is a new Ministerial Decision No. 265 of 2023 relating to Qualifying Activities.
- Lack of Clarity: However, these updates do not refer to the explanation provided for the public consultation regarding the import/export requirement for Qualifying Activities.
EXPECTATIONS & TAKEAWAY
The environment of qualifying activities and, accordingly Corporate Tax Rate is fluid. It has been demonstrated that persons in Designated Free Zones have not received guidance from the authorities to achieve comfort on whether the physical importation/exportation of goods is an obligation to qualify for the 0% Corporate Tax Rate. It is likely we will receive more guidance from the authorities as we deal with the changing regulatory environment.
The Creation Business Consultants Tax department is here to assist you in determining the Corporate Tax Rate for persons located in a UAE Free Zone and conducting international trade activities, and not UAE domestic trade. For free consultation or inquiries contact us either via email at [email protected] or by phone at +971 4 8786240 today.
