Qualifying Income is defined as the income that qualifies for the 0% corporate tax rate applicable to entities within the UAE’s Free Zones after satisfying the criteria stipulated in Cabinet Decision No. 100/2023. Qualifying Income is not associated with a business or establishment of the Qualifying Free Zone Person beyond the Free Zone.
Also read: UAE Private Clarification Requests: New Refund Policy
Qualifying Income must be derived from economic activity to be carried out inside the Free Zone, without the participation of a Domestic Permanent Establishment or a Foreign Permanent Establishment.
- A Domestic Permanent: Establishment means a fixed place of business or a dependent agency where the business of a Qualifying Free Zone Person is carried out in the UAE but not in the Free Zones. This includes offices, branches, factories or any other physical locations used by the Qualifying Free Zone Person in the mainland of the UAE which exposes these operations to the UAE’s corporate tax laws.
- A Foreign Permanent Establishment: It refers to a place of business from where the business of the Qualifying Free Zone Person is carried out in another country other than the UAE. This includes any permanent establishments or controlled foreign companies that are used by the Qualifying Free Zone Person to carry on business outside the state. These are governed by the tax rules and laws of the countries they operate in since the Qualifying Free Zone Person’s scope has been extended internationally.
- Income from Movable Property: It is not obtained from the use or disposal of fixed property like land or buildings in the UAE or in any other country. This means that the income has to be received by activities and from the movable property, for example, a good, service, or an idea.
- Income from Other Free Zone Entities: Income earned from goods and services sold to other Free Zone entities other than Excluded Activities as excluded activities are not in the ambit of tax exemptions. The Excluded Activities defined in the Ministerial decision included non-qualifying activities, banking, insurance and reinsurance, and other financial institutions.
- Income from Qualifying Activities with Non-Free Zone Persons: This is based on a transaction with a Non-Free Zone Person but in regard to Qualifying Activities which in this context refers to any activities that qualify the trader for the tax incentives. The Qualifying Activities are also approved by the Minister of Finance and it also depends on the Free Zone under consideration. Manufacturing, Trading and services are some of Qualifying Activities.
- Income Meeting De Minimis Standards: It is any other income that meets the de minimis standards which are standards that the Minister of Finance has laid down concerning the minimum amount or percentage of Qualifying Income that the Qualifying Free Zone Person has to have. It is also important to specify that de minimis requirements can also differ depending on the Free Zone to which the company belongs and the type of income received. For instance, de minimis for the income from services may be 10% of the total income of the Qualifying Free Zone Person.
Criteria for Qualifying Income
The income of a Qualifying Free Zone Person (QFZP) from qualifying activities is called qualifying income. The gross income derived from the qualifying activities is tax-exempt, while the gross income that is non-qualifying should not exceed five per cent of the total gross receipts or AED 5 million, whichever is lower, to fall under the de minimis rule.
Conditions to the 0% Corporate Tax Rate
To avail the 0% corporate income tax, it is crucial not to elect the standard corporate income tax rate by the Qualifying Free Zone Person (QFZP). Article 34 of corporate tax states that the entity must apply the arms’ length principle and the requirement of documentation of the transfer pricing under Article 55. This is in line with the free zone policy that promotes a zero percent tax regime in the zones undertaken by the authority.
Exclusion From Qualifying Income
- Incorporeal Revenue: Revenue that arises from intangible assets or non-physical sources, such as intellectual property, financial instruments, or licensing agreements.
- Dealings with Non-Covered Persons: Income generated from transactions with individuals or entities that are not covered by the specific statute, including those outside the Free Zone regulations.
- Merchantable Real Property: Transactions involving commercial real estate or property intended for sale or lease, which generate income.
- Non-Commercial Real Estate in the Free Zone: Revenue from dealing with real estate within the Free Zone that is not used for commercial purposes, such as residential or personal use properties.
- Taxation Rate: All of the above income categories are subject to the standard 9% corporate tax rate, as they do not qualify for the favorable tax treatments available to certain Free Zone activities.
What are Qualifying Activities?
Qualifying Activities are the following activities, which the Qualifying Free Zone Person can perform in order to generate Qualifying Income.
Essentials of Qualifying Activities
Free Zone companies can benefit from a 0% corporate tax rate when they sell goods or services, excluding Excluded Activities, to other Free Zone entities who will use them. Sales to Non-Free Zone Persons may also qualify if they fall under specific activities mentioned in Ministerial Decision No. 265 of 2023.
Key Qualifying Activities Include:
- Product fabrication and material treatment
- Commodity trading
- Shareholding for investment
- Ship management
- Reinsurance and fund management
- Managing money exchanges and investments
- Headquarters and treasury services for related parties
- Financing and leasing aircraft
- Handling goods and logistics within specified zones
These activities are defined by standard business operations and related practices.
Economic Connection With the Free Zone
Application of the provision of the law requires the Qualifying Free Zone Person to have sufficient economic connection with the Free Zone. Consequently, it requires that a Qualifying Free Zone Person must have sufficient business substance which can include employees, assets and business activities within the Free Zone concerning the income derived from the Qualifying activities.
Also read: Basic Tax Information Bulletin for Natural Persons
The Minister of Finance can design the lists of the criteria necessary for the proper classification of the substantial economic presence, including the number of employees, the amount of property, and the type of activities.
Adherence to UAE Tax Law
The UAE under various provisions shield the Qualifying Free Zone Person (QFZPs) earning income from Qualifying activities. Tax exemptions are applicable only for the Qualifying Free Zone Person (QFZPs) that operate strictly within the frameworks of the Qualifying Income from Qualifying Activities.
Qualifying Free Zone Person (QFZPs) can effectively manage their business and its activities, using tax incentives. The UAE offers tax benefits that QFZPs should meet to ensure they meet the set conditions and thus achieve growth and success within the Free Zones.
FAQs
How To Define Qualifying Income?
Qualifying Income means the income which would constitute Qualifying Services, income that would enable a legal body to be eligible for a 0% corporate tax in the Free Zones in the UAE.
How Can Qualifying Income Be Distinguished From Other Income?
Qualifying Income may only arise from operation in the Free Zone, and must not originate from Domestic or Foreign Permanent Industrial or Commercial Establishments. It is governed by some conditions and has to abide by standards as enumerated in the Cabinet Decision No. 100 of 2023.
What Are Some Qualifying Activities?
These include product construction, purchase and sale of goods and merchandise, ownership of shares for the purpose of dividend, managing of ships, reinsurance, and operation of money exchanges and investments etc.
What Is Meant by Excluded Activities?
Excluded Activities are activities that are not covered under the tax exemptions as given below:
- Incorporeal Revenue
- Dealings with Non-Covered Persons
- Merchantable Real Property
- Non-Commercial Real Estate in the Free Zone
